4 Steps to Initiating Business Model Innovation

Business model innovation is an increasingly common topic.  The advent of freemium and non-linear revenue generation is shaking the foundations of many established organizations whose tried-and-true business models are feeling constrained and sluggish. Even large organizations with strong track records of innovation are feeling consistent pressure to keep up with these rapidly changing market dynamics (Terlep, 2017).  Ironically, many business leaders and strategist have given very little thought to their business model.  Here are four steps, and resources, to assist in getting a grip on initiating business model innovation.

#1 Understand What Your (a) Business Model Is

Perhaps it is an artifact of our technology driven culture where massive companies are built without ever even having a business model, but before you can innovate a business model, you need to understand what a business model is in its most basic form, and what your specific model is.  At its core a business model comprises two basic concepts:

  1. Value Creation (how do you create value); and,
  2. Value Capture (how do you capture some of that value as profit) (Matzler, Bailom, von den Eichen, & Kohler, 2013).

While perhaps pedantic, understanding this basic construct of a business model is highly informative and the progenitor to all other business decisions. They are also the starting place for business model innovation.  Increasing the perceived value of your product without changing the cost to produce it can increase market penetration by being seen as a value offering if you don’t increase price, can increase profit if you capture this new value as profit by also raising prices, or both if the increase in perceived value is greater than the increase in price.  Conversely, maintaining perceived value, but reducing price or the costs to create the product can affect profit.  All business decisions start at this basic level and the business model informs every other aspect of the business.

The part of a business model most misunderstood is the effect of perceived customer value; yet this is one of the most important factors.  Even if your product is no different from competitors, if customers perceive it as more valuable, you have created more value – value you can capture either as market share or in direct profit.  This makes understanding your product’s value proposition a key part of business model innovation.

#2 Understand Your Product/Service Value Proposition

Many businesses either don’t understand the true job that their product performs for their customers, or believe it has no effect on the bottom line (Christensen, Anthony, Berstell, & Nitterhouse, 2007).  Yet, understanding how and why a customer is using your product or service is a key component to evaluating the perceived value.  If you don’t know what job your product is performing, it is difficult to properly affect the perception of how well it does that job.  Christensen, Anthony, Berstell, and Nitterhouse (2007) document several examples of how understanding the right job for your product is essential to understanding perceived value.

For example, how does the value of certain features of your product change depending on how the user is using it?  Does a soccer mom have a different perception of her vehicle than a travelling salesperson?  Does this perceptual difference affect the perceived value of your current product?  Understanding how your products and services are perceived and what their true function is in the lives of its consumers is critical to your business model.  Not only will it help you find ways of maximizing your current business model, it may also lead to new ways of capturing and/or creating value (Bettencourt & Ulwick, 2008).

Understanding how the percieved value of your offering differs, and what contexts affect this perception is a gateway to finding new ways of value capture.  Instead of just offering a product, there may be services when combined with the product could greatly elevate the value.  The easiest example of this is the iTunes store added to the iPod.  Not only did the iTunes store add a significant new revenue stream to apple, it greatly increased the value of the iPod because it worked seamlessly with iTunes to make finding and exploring new music simple.  Capturing “out-of-band” value is an excercise in nonlinearity.

#3 Understand Nonlinearity

Linear bias, the tendency for humans to think in straight-line correlations, can lead to very costly mistakes (Bart de LangheStefano PuntoniRichard Larrick, 2017).  While understanding we live in a nonlinear world is important in and of itself, it can have pronounced effects on business models.  This linear thinking process can severely limit your ability to understand or comprehend business model innovation; we are taught from day one in business school that profit is generate through the difference between the cost to create a product and the price we sell the product for.  In Competing Against Free (2011), Bryce, Dyer and Hatch examine how this linear approach to business models can prevent successful organizations from competing with start-ups using nonlinear business models to capture value indirectly.

The reality is we generate profit based on the cost to create value, and how much of that value we can capture.  This does not suggest that we must capture value directly from the sale of the product, nor does it say we can’t. This is most readily visible in software subscriptions (Microsoft, Adobe) and other technology sectors, but companies like Gillette, HP, and others have built their business similarly for decades.  By selling their “products” at, or below, cost and captured value through the supplies necessary to keep those products functioning they have moved from “product” companies to “service” companies by realigning how they create and capture value.    Evaluating the cost and benefits of these approaches is why understanding nonlinearity is especially important to business model innovation.

#4 Understand Whether to Innovate, How, and When

One of the lessons of Competing Against Free (Bryce et al., 2011) is just because someone else has a different business model, doesn’t necessarily mean you should change yours as well.  Business model innovation is not a simple process and can depend on the conditions of the market and internal dynamics like the presence of leadership capable of making tough decisions and building organizational consensus (Giesen, Riddleberger, Christner, & Bell, 2010).   This is not a process for the faint of heart as it likely affects every aspect of your business from how you market and sell your products, the partner organizations you work with, and even basic accounting, cost-controls, and financial reporting.  Since the business model is the most basic statement of your “theory of business”, changing your model changes everything.

The positive side is that even if you don’t implement a complete business model change, going through these steps will surely uncover a host of ideas about how you can elevate customer perceived value or better capture the value you already create.  It may also help you better understand what new competitive business models might be lurking out there, how they operate, and how you can address them should they come knocking.  Lastly, it may lead to a business model refresh, softening the organization for the day a full business model innovation needs to take place.


Bart de LangheStefano PuntoniRichard Larrick. (2017). Linear Thinking in a Nonlinear World. Harvard Business Review, (June). Retrieved from

Bettencourt, L. A., & Ulwick, A. W. (2008). The customer-centered innovation map. Harvard Business Review, 86(5), 109–114.

Bryce, D. J., Dyer, J. H., & Hatch, N. W. (2011). Competing against free. Harvard Business Review, 89(6). Retrieved from

Christensen, C. M., Anthony, S. D., Berstell, G., & Nitterhouse, D. (2007). Finding the right job for your product. MIT Sloan Management Review, 48(3), 38. Retrieved from

Giesen, E., Riddleberger, E., Christner, R., & Bell, R. (2010). When and how to innovate your business model. Strategy & Leadership, 38(4), 17–26.

Matzler, K., Bailom, F., von den Eichen, S. F., & Kohler, T. (2013). Business model innovation: Coffee triumphs for Nespresso. The Journal of Business Strategy, 34(2), 30–37.

Terlep, S. (2017). Procter & Gamble vs. Nelson Peltz: A Battle for the Future of Big Brands – WSJ. Retrieved October 9, 2017, from


The Processes of Innovation

Successful innovation requires more than just an idea, but the knowledge necessary to develop and deliver innovation based on those ideas.  Even with access to rich knowledge resources, failure is an inherent part of the innovation process (McGrath, 2011).  Processes for selecting, promoting, and executing innovative ideas are critical to innovative strategy.

Different Types of Knowledge Development Processes

Capturing the full value of an organization’s knowledge resources requires understanding the value of various knowledge sources and the processes for selecting, promoting, and executing on the most promising ideas.  Not all knowledge has the same value to the organization, nor can it be captured using the same processes (Mahroeian & Forozia, 2012; Wilson & Doz, 2011).  Wilson and Doz identified three different types of knowledge: existential, embedded, and explicit; although, Mahroeian and Forozia simply define knowledge as existing on a continuum between explicit and existential (or tacit). Each of these knowledge resources requires unique processes and systems for effective utilization by the organization.  Leveraging the concepts of agile innovation (Wilson & Doz, 2011), these processes include attracting, foraying, and experiencing.


Attracting is a process designed to bring ideas into the organization from outside.  What may once have been the sole domain of customer experience surveys and suggestion boxes has evolved rapidly over the last few years.  Today, attracting is commonly achieved via communities of excellence, online community forums, and crowdsourcing platforms.

Leveraging the concepts of agile innovation, these processes include attracting, foraying, and experiencing.


While attracting, once initiated, is mostly a passive activity managing the influx of ideas and opportunities, foraying is a much more active activity.  Foraying is a process where individuals within the organization seek out and discover information and ideas.  This can be formalized as business development activities, or accidental as part of the normal business interactions with customers, vendors, or other employees.  Foraying requires more direct involvement in uncovering potential ides.


On the opposite end of the spectrum from attracting is experiencing.  Some knowledge and ideas cannot be fully understood or mastered without experiencing them directly.  This is particularly true with tacit knowledge, or ideas rooted intricately in the culture or context in which they originated.

Is the Juice Worth the Squeeze?

The process to capture, promote, and execute on the different types of knowledge requires varying degrees of effort.  For instance, Wilson and Doz suggested explicit knowledge was easiest to capture through an attracting process similar to virtual communities (VC’s) or crowdsourcing approaches (Hammon & Hippner, 2012; Schröder & Hölzle, 2010). VC’s provide an organization a simple, cost-effective method for capturing the innovative ideas of the masses.  At the same time, this easily codified and transmitted knowledge can also be easily stolen or replicated by competitors, diminishing its competitive value.

On the other end of the spectrum, Wilson and Doz argued tacit knowledge can only be acquired through an experiencing process involving greater time and investment targeted at specific markets, challenges, and geographies. This tacit knowledge is more difficult and expensive to obtain. Yet, because of the time and investment, it is also much more difficult for competitors to replicate, which means it also holds much greater strategic value.

Organizations need to develop integrated methods of accessing and converting these resources into viable products and service opportunities, suggesting processes cannot only be for ideation, but also for the selection and continued development of innovative solutions.  At the same time, they must fully understand the risks and rewards associated with the means of accumulating and developing that knowledge.  This is a critical element of innovation success.

Fitting Process into the Innovation Strategy Framework

Innovation processes represent the specific tools through which the organization engages knowledge resources in ideation and execution (black boxes in Figure 1). Per Wilson and Doz, these are not mutually exclusive, but represent potential means of engaging knowledge resources as required in the development of innovative solutions.  For instance, ideation might be achieved using VC’s (attracting), but further development might require rapid prototyping (Sandmeier, Morrison, & Gassmann, 2010; Tuulenmäki & Välikangas, 2011) using direct, on-site customer engagement (foraying), or long-term development within market (experiencing).  Likewise, innovative ideas developed through experiencing might be tested in different markets (foraying) or through crowdsourced selection processes (attracting).  The processes are the formalized ways in which the people across the model interact; they are the tools of innovation selection and development.


The Innovation Strategy Framework

Furthermore, successful innovation practices require the continued application of knowledge resources from ideation through execution.  The prospect of failure is not only inherent to innovation, failure is a likely part of innovation execution (McGrath, 2011).  McGrath encouraged organizations to embrace the learning opportunities inherent in innovation execution, proposing the use of small-scale experimentation to minimize large-scale failure.  The application of rapid-prototyping and extreme programming processes to new product and service development promote similar practices (Abele, 2011; Sandmeier et al., 2010; Tuulenmäki & Välikangas, 2011).  Sandmeier et al. investigated the use of extreme programming practices in the development of innovative products, and found the early and continued involvement of diverse external knowledge resources was positively related to successful innovation.  Tuulenmäki and Välikangas extolled the similar value of rapid prototyping and experimentation in the successful execution of innovative solutions.  Each of these perspectives suggest the continued inclusion of an organization’s knowledge resources throughout innovation execution to refine and develop optimal solutions.   As a result, the use of attracting, foraying, and experiencing processes to leverage an organization’s knowledge network does not end once ideation is complete, but must be integrated across the entire innovation process.

Opening the entire innovation process to actors beyond the direct control of the organization requires significant dedication from an organization’s leadership.  Developing a culture of innovation is the final major element of innovation strategy.




Abele, J. (2011). Bringing minds together. Harvard Business Review, 89(7–8). Retrieved from

Hammon, L., & Hippner, H. (2012). Crowdsourcing. Business & Information Systems Engineering, 4(3), 1–166.

Mahroeian, H., & Forozia, A. (2012). Challenges in managing tacit knowledge: A study on difficulties in diffusion of tacit knowledge in organizations. International Journal of Business and Social Science, 3(19), 303–308. Retrieved from

McGrath, R. G. (2011). Failing by design. Harvard Business Review, 89(4), 76–83. Retrieved from

Sandmeier, P., Morrison, P. D., & Gassmann, O. (2010). Integrating customers in product innovation: Lessons from industrial development contractors and in-house contractors in rapidly changing customer markets. Creativity and Innovation Management, 19(2), 89–106.

Schröder, A., & Hölzle, K. (2010). Virtual communities for innovation: Influence factors and impact on company innovation. Creativity and Innovation Management, 19(3), 257–268.

Tuulenmäki, A., & Välikangas, L. (2011). The art of rapid, hands-on execution innovation. Strategy & Leadership, 39(2), 28–35.

Wilson, K., & Doz, Y. L. (2011). Agile innovation: A footprint balancing distance and immersion. California Management Review, 53(2), 6–26.

Fear Not the AI Overlords! Humans Have Intrinsic Value.

There is significant hype about Artificial Intelligence (AI) and its potential to take over many jobs thought safe from Automation.  It has been suggested AI could replace accountants, lawyers, doctors, and even general management activities.  While it is true that advances in AI will certainly change many jobs, as so often happens, the fear is exaggerated.  First, there is no evidence to support the notion automation has ever eliminated more jobs than it has created.  Second, and more importantly, humans have intrinsic value that is unlikely to ever be replicated or replaced.

The Fear of Losing Jobs

Before anyone gets too excited, a recent Wall Street Journal article highlights the facts of mass automation in the past.  Technology from the cotton gin through AI has always eliminated some jobs, but historically it has also created far more and better paying jobs as a result.  Sure surrey drivers were put out of work with the advent of the automobile, but the auto industry created millions of jobs supporting the US GDP for decades.  AI is simply the latest in a long-line of technological advances feared to lead to the end of our society.  It has never happened before and is unlikely to happen anytime soon.  It is true that some jobs may cease to exist, but this will be accompanied by a growth of new jobs supporting the AI industry.  Even more remarkable will be the new jobs that don’t even exist today.

A recent report from the Institute for the Future estimates 85% of the jobs today’s students will perform by the year 2030 haven’t yet been invented.  This is a difficult prospect for today’s workers to imagine, but it is not without precedent.  Student’s graduating high school in the 1990’s could not have imagined careers working in web design, social media, or – for that matter — artificial intelligence, machine learning, and big data.  Another recent article from MIT Sloan Management Review hints at some of the new jobs AI technology may create.

On top of all of that, it is unlikely many of the jobs being predicted to succumb to AI will actually go away.  It is much more likely they will be augmented and changed than disappear entirely.  And the reason is simple: humans have innate value in performing jobs in a human society.

Humans Have Intrinsic Value

Although AI is redefining what is considered automata by allowing more variation in performance, it is still not human.  Human beings are defined by the irrational and emotional more than they are by cold, calculated precision.  While this may seem to be a negative aspect of humans, it is also the source of the innovation, creativity, and passion that simply cannot be replicated.  Just for sake of argument, let’s examine just one of the jobs proposed to be replaced in the future by AI: management.

Business management is an oft misunderstood discipline, which does not benefit from the HR moniker “people manager”.  You manage objects, but you lead people.  Objects are managed to gain efficiency, but they have finite limitations. You cannot encourage a robot to be more productive.  You cannot ignite passion in your inventory tracking software to go above and beyond.  Yet human beings have nearly limitless capability to “reach for a goal”, “put in extra effort”, or “embrace shared visions”.  While this can also work to reduce human performance (as discussed in this article from MIT Sloan Management Review), this is critical distinction when looking at the effects of AI in particular.

Management, in its truest sense, is absolutely ripe for AI replacement.  Eliminating the idiosyncracies of human performance can have significant value to organizations.  AI is simply better able to gather, process, and act on vast amounts of data where human input is less vital (although not necessarily irrelevant).  By offloading these tedious and taxing responsibilities, while also improving their performance, humans can spend more time doing the things where they have intrinsic, and irreplaceable value (See article from Swiss Cognitive).

Leadership, on the other hand, will no longer need to take backseat to management.  By focusing on leadership, organizations will not only gain the advantages of AI-based management efficiency, but also from the benefits of stronger human performance.  In essence, organizational leaders will be able to offload the tasks they don’t do very well anyway, and focus on the actions that lead to truly superior performance.

Fear Not!!

While the example above focuses on my area of expertise, the same can be said for many other jobs ripe for AI augmentation.  AI, like the cotton gin and automobile before it, are tools that will augment and improve the way we work.  Yes, some jobs may be significantly reduced or eliminated; however, they will be replaced by newer and better jobs.  The jobs getting augmented by AI will simply change, putting more focus on the human aspect.  It is not the end of the world.



“Zone to Win” Missing Critical Elements of Innovation Strategy

Although Zone to Win: Organizing to Compete In an Age of Disruption by Geoffrey Moore is a wonderful framework for the management of organizational resources to both lead, as well as survive, disruptive innovation, there are some missing elements that might prove useful to readers.  Specifically, Moore focuses on management, and although absolutely necessary, management does not supersede strategy or innovation in long-term success.  Zone to Win fails to encompass appropriate innovation strategy in two ways: the idea of disrupting your own organization, and gap between innovation ideation and implementation.

The Strategy of Disrupting Your Own Organization

Moore seems uncharacteristically blunt on the idea of organizations needing to disrupt their own business.  Moore suggests “all that stuff about how you have to learn to disrupt ourself–it’s baloney. It can’t be done.”  Moore’s contention is that it is impossible for an established business to replace one business model with another; yet, later in the book documents the success of organizations like Adobe and Microsoft that have radically changed their business models to deliver software via subscription instead of perpetual licensing.  It turns out Adobe and Microsoft are two excellent examples for exploring why it is absolutely important for organizations to engage in deliberate acts of self-disruption.  Adobe intentionally disrupted their existing business model (a highly profitable one) before anyone else could eat their lunch; Microsoft changed theirs only after Google started taking away their business.  Adobe was seen as a leader; Microsoft as a laggard.

From an organizational strategy standpoint, it is absolutely critical to develop strategic scenarios of how the future world may look, and how those changes may affect your existing business model.  Scenario planning provides context that is essential when disruption happens, but more importantly, can presage potential disruptions before they happen.  If scenario planning illuminates a significant threat, the organization has only two options: disrupt their own business in order to transfer old business to new business; or, let someone else start eating away your customer base.  It can be argued that cannibalizing your own business, if only to prevent someone else from doing so, makes sense in its own right.  If that new business also portends an era of growth, more the better.

Working to disrupt your own business should not be an organization’s only focus, but failure to even contemplate it, or act upon it, is a strategic failure.

Moore does cover how an organization can respond to disruptive innovations once the initial attacks begin and makes an excellent case for how to manage those attacks.  However, by dismissing, out of hand, the idea that an organization can lead those disruptions, and thus avoid the attack in the first place, Moore seems to completely discount the value of doing so.  While a brilliant theorist like Moore likely meant to dissuade companies from trying a wholesale rip-and-replace of their business model (not something any serious innovation strategist would propose), simply dismissing the strategic value of self-disruption seems cursory.  Moore’s stance is even more glaring considering the zone management framework he proposes actually makes it possible to disrupt your own business in a structured, well-managed way.

Working to disrupt your own business should not be an organization’s only focus, but failure to even contemplate it, or act upon it, is a strategic failure.

Mind the Gap

Another topic which gets too little attention in Zone to Win, is the gap between innovation ideation and the development of the Incubation Organizational Units (IOUs) suggested to incubate and develop promising innovation efforts.  Here again, Moore proposes management organization and governance brilliantly, but only once the innovation ideas get to the point of being a well-formed business proposals.  What is missing is the innovation strategy to get from ideation to the point of proposal.  Aside from a brief mention of internal R&D or other means, Moore fails to specify where this fits in the zone management framework, or how to appropriately fund it.

There is substantial research supporting the notion that “having ideas” is not the challenge for most established organizations.  On the contrary, the most commonly cited challenge is in identifying ideas with potential, and exploring them to the point where they can be taken as serious projects for the organization.   This process needs to be budgeted for, managed, and held accountable in order to be successful.  Without it, the only projects that move forward will be those lucky enough to have a champion with the authority, clout, and budget to develop them.  This creates a choke point to innovation.

Yet, it misses the fact most start-ups don’t start life with venture capital; they start with funding from the founders and personal investors until they have something they can pitch to those VCs.

Moore’s framework suggests treating IOUs as “start-up” companies and funding them just like venture capitalists (VCs) would, which is (again) a brilliant way to manage well-formed ideas.  Yet, it misses the fact most start-ups don’t start life with venture capital; they start with funding from the founders and personal investors until they have something they can pitch to those VCs.  This stage in the innovation cycle is critical and where most start-ups fail.  It is the large end of the funnel.  In such a well thought-out framework as Zone to Win presents, missing this critical element is disappointing.

Appropriately funding and managing the initial R&D neccessary to initiate innovation is just as critical to success as any other component.  However, the idea of funding pure R&D is not common among many of the organizations that would most benefit from taking Moore’s framework to heart.  Even technology organizations often do this as skunkworks or “off-the-books” projects with little organization, governance, or metrics.  Moore’s failure to address this misses a critical element in successfully leading disruptive innovation.

A Step in the Right Direction

Barring these two criticisms, Moore’s work has certainly cemented his place in the annals of business gurus and shows a continuing dedication to helping organizations overcome their own success.  The zone management framework provides a blueprint for overcoming the obstacles Clayton Christensen (and colleagues) frequently cites as the downfall of established organziations in light of disruptive innovation.  Most importantly, Moore adds significant credibility to the idea that innovation can only be truly successful if: a) it is done outside of the main business (incubation versus performance zones); and, b) it is treated with the same care and dedication used to manage any business process.   By addressing the importance of strategic planning, and formally defining the R&D component, zone management would be even better.

Lastly, one word of warning to devotees seeking to implement zone management. Remember the words of Michael Porter: “strategic positioning, means performing different activities from rivals’ or performing similar activities in different ways (1996, p. 62).  Frameworks like Moore’s are effective tools, but without making them your own, they lose their strategic value.  This is where leadership takes over from management.


Porter, M. E. (1996). What is strategy? Harvard Business Review, 74(6), 61–78. Retrieved from


The Three “People” Needed for Successful Innovation

Despite decades of research into the constructs of innovation, few practical sources of sustained innovation have proven causal to organizational success.  A cursory examination of innovation theory fails to provide concrete evidence that innovation, in itself, is key to long-term success; most innovation theories rely on post-hoc analysis of firm performance focused on successes, rather than failures (Buisson & Silberzahn, 2010; Burke, van Stel, & Thurik, 2010).  The term innovation is just as difficult to articulate being equally evaluated through ex post selection of successful innovation rather than innovative efforts in general.  While innovation may not guarantee firm success, it is clear that organizations failing to adopt to the pace of the modern, global marketplace will flounder (Reeves & Deimler, 2011); the chances of success increase dramatically if organizations are positioned to innovate and change in response.  As such, understanding the models, systems, and approaches improving an organization’s ability to innovate are increasingly important even if they are not proven to promote long-term success, or even successful innovation. This is the basis of the Innovation Strategy Framework, which attempts to combine multiple theories of innovation into a single construct.


Figure 1. The Innovation Strategy Framework

Today, we are going to look at the importance of people to innovation strategy, what those people do, where they come from, and why they are important to innovation.

Human capital, or the knowledge, skills, abilities and other characteristics (KSAO’s) of the people associated with the organization are the source of innovation.  Human capital is a critical starting point and requirement for the development of organizational knowledge and innovation capabilities (Choong, 2008; Ployhart, Nyberg, Reilly, & Maltarich, 2014).  This is not just the employees of the organization, but also the knowledge resources of partners and other collaborators.  The greater the diversity and density of these knowledge resources, the greater the potential for organizations to achieve innovative outcomes (Dell’Era & Verganti, 2010; Phelps, 2010).   Clearly, the depth, breadth, and quality of the people in the organization are critical dimensions of innovation capability.

The three main groups of people necessary for successful, serial innovation capability are: the people with innovation ideas, the people nurturing and developing ideas into successful innovation, and the organizational leadership fostering innovation.

People as the Source of Ideation

The largest group of people involved with innovation is the infinite sources of innovation ideas (left side of Figure 1).  This group of people, including customers, partners, employees, and others, are the heterogeneous sources of knowledge providing innovative ideas and solutions.  These resources are both internal and external, creating the depth, breadth, and diversity of knowledge to supply the organization with innovative fuel (Dell’Era & Verganti, 2010; Phelps, 2010; Rothaermel & Hess, 2010).  The composition of an organization’s knowledge ecosystem (employees, partners, customers, and others) significantly contributes to the ability of an organization to successfully innovate (Dell’Era & Verganti, 2010; Engel & Del-Palacio, 2011; Kim & Ployhart, 2014; Phelps, 2010; Rothaermel & Hess, 2010; Sandmeier, Morrison, & Gassmann, 2010; Wilson & Doz, 2011).

Interestingly, while this is the largest group of people directly involved with innovation efforts, they are not necessarily the most important.  Yet, many organizations embark on innovation efforts by encouraging their employees to “be more creative”, or “be innovative”.   To the contrary, research suggests most organizations have far more innovation ideas than they can possible deal with; the problem is selecting and developing ideas into real-world solutions.  While organizations need to encourage innovation and creativity, making it the primary focus of innovation efforts will fail more often than succeed. The belief that innovation stems from the rare, perfect idea is a pervasive myth.

Ideation is essential, but completely useless without the other people necessary for innovation success.

People Strategically Selecting and Developing Innovation

On the right side of Figure 1, people in the strategic domains represent the knowledge resources responsible for taking innovative ideas and developing them in alignment with organizational goals and strategy (Ramírez, Roodhart, & Manders, 2011). This group of people is arguably the most important innovation resource in the organization as they are often able to achieve innovation in the absence of well-defined innovation strategies or formally defined roles to direct innovation.  Unfortunately, in the absence of a strategic innovation practices, innovation success is less than assured, becoming the victim of conflicting responsibilities.

Instead of relying on happenstance, organizations should create specific job roles whose entire function is to surface, develop, and promote innovation ideas specific to one strategic organizational goal.  While the strategic goals themselves may change from year-to-year, or be longer term, these strategic innovation specialists are charged with all aspects of taking ideas aligned with their strategic focus from ideation all the way through market release.  These individuals are like innovation product managers, with a portfolio of potential innovation ideas.

The caveat here is that each individual (or team) should be focused solely on one strategic organizational goal, and must have the appropriate resources (outside of existing product management) to develop and mature their innovation portfolio, which leads us to the last group of people necessary for succesful innovation.

Innovation Leadership

Developing an innovation capability within an organization takes substantial effort (Barreto, 2010; Wilson & Doz, 2011).  Accumulating the vast knowledge resources to drive innovation and implementing the systems and processes to integrate knowledge into innovative execution takes significant resources, will, and commitment.   At the top of Figure 1, innovation leadership develops knowledge networks, provides resources to create innovation processes, and the creation, funding, and direction of strategic domain groups (Brown & Anthony, 2011; Engel & Del-Palacio, 2011; Ramírez et al., 2011; Rufat-Latre, Muller, & Jones, 2010).  Without dramatic changes in the way organizations are led, innovation cannot consistently take root (Hamel, 2009).

Innovative management strategies incorporate novel ways of interacting with customers, driving cultures of trust, and opening the organization to honest debate (Abele, 2011; Capozzi, Dye, & Howe, 2008; McGrath, 2011).  McGrath argues fear of failure inhibits organizations from achieving great innovation and an acceptance of potential failure can help organizations use failure to achieve success. Capozzi, Dye and Howe report the benefits of challenging the status quo of the organization often presents a springboard to innovation.  In much the same way reducing the fear of failure helps to spark responsible risk taking, reducing the fear of challenging organizational orthodoxies helps ensure that new ideas are not discarded simply because they are counter to the way things are currently done.  These cultural changes are more difficult than getting the right people or developing systems and processes; they require commitment at the highest levels of the organization.  Without leadership demonstrating this commitment to innovative practices, organizations are unlikely to truly capture their innovative capabilities.

Bridging the Divide

Having all the right people is critical to achieving long-term innovation capability.  Organizations already have an embarrassment of riches in terms of innovative, creative ideas, but without the appropriate people committed and dedicated to their development, innovation success is only a matter of chance.  It happens all the time, but rarely more than once or twice within the same organization.  Only the organizations designed and aligned to foster innovation and committed to the process achieve long-term, repeatable innovation success (think Shell, P&G, or 3M).  Simply telling your employees to be more innovative or offering a suggestion box is not sufficient.

Even having the right people is not enough.  Without the processes governing how these people work together to create successful innovation, success is possible but not guaranteed.  In the next Innovation Playbook, we will look at how to manage the innovation process for success. 



Abele, J. (2011). Bringing minds together. Harvard Business Review, 89(7–8). Retrieved from

Barreto, I. (2010). Dynamic capabilities: A review of past research and an agenda for the future. Journal of Management, 36(1), 256–280.

Brown, B., & Anthony, S. D. (2011). How P&G tripled its innovation success rate. Harvard Business Review, 89(6), 64–72. Retrieved from

Buisson, B., & Silberzahn, P. (2010). Blue ocean or fast-second innovation? A four-breakthrough model to explain successful market domination. International Journal of Innovation Management, 14(3), 359–378.

Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. five forces. Harvard Business Review, 88(5), 28. Retrieved from

Capozzi, M. M., Dye, R., & Howe, A. (2008). Sparking creativity in teams: An executive’s guide. McKinsey & Company, (April 2011), 1–8. Retrieved from

Choong, K. K. (2008). Intellectual capital: definitions, categorization and reporting models. Journal of Intellectual Capital, 9(4), 609–638.

Dell’Era, C., & Verganti, R. (2010). Collaborative strategies in design-intensive industries: Knowledge diversity and innovation. Long Range Planning, 43(1), 123–141.

Engel, J. S., & Del-Palacio, I. (2011). Global clusters of innovation: The case of Israel and Silicon Valley. California Management Review, 53(2), 27–49.

Kim, Y., & Ployhart, R. E. (2014). The effects of staffing and training on firm productivity and profit growth before, during, and after the Great Recession. The Journal of Applied Psychology, 99(3), 361–89.

McGrath, R. G. (2011). Failing by design. Harvard Business Review, 89(4), 76–83. Retrieved from


Phelps, C. C. (2010). A longitudinal study of the influence of alliance network structure and composition on firm exploratory innovation. Academy of Management Journal, 53(4), 890–913.

Ployhart, R. E., Nyberg, A. J., Reilly, G., & Maltarich, M. a. (2014). Human capital Is dead; Long live human capital resources! Journal of Management, 40(2), 371–398.

Ramírez, R., Roodhart, L., & Manders, W. (2011). How Shell’s domains link innovation and strategy. Long Range Planning, 44(4), 250–270.

Reeves, M., & Deimler, M. (2011). Adaptability: The new competitive advantage. Harvard Business Review, 89(7/8), 134–141. Retrieved from

Rufat-Latre, J., Muller, A., & Jones, D. (2010). Delivering on the promise of open innovation. Strategy & Leadership, 38(6), 23–28.

Rothaermel, F. T., & Hess, A. M. (2010). Innovation strategies combined. MIT Sloan Management Review, 51(3), 13–15. Retrieved from

Sandmeier, P., Morrison, P. D., & Gassmann, O. (2010). Integrating customers in product innovation: Lessons from industrial development contractors and in-house contractors in rapidly changing customer markets. Creativity and Innovation Management, 19(2), 89–106.


Wilson, K., & Doz, Y. L. (2011). Agile innovation: A footprint balancing distance and immersion. California Management Review, 53(2), 6–26.

The Versatilist Vs. the Peter Principle

It is surprising how few are familiar with the Peter Principle.  This is most disturbing in the areas of business and organizational psychology as it speaks directly to the source of innumerable challenges for organizational success.  It should be a risk factor in talent management, succession planning, and organizational compensation systems.  Most of all, organizations should look at ways to circumvent this process; most notably, organizations should consider how Verstalists can thwart the Peter Principle.

The Peter Principle

“In a Hierarchy Every Employee Tends to Rise to His [Her] Level of Incompetence” (Peter & Hull, 1969, p. 25).

In action, the Peter Principle states a simple inevitability.  If you are good at your job, you get promoted.  If you are good at the new job, you get promoted again.  This continues until you take on a job for which you are not well suited; i.e. incompetent.  Having reached your level of incompetence, you no longer get promoted, but stay within the job you are least capable of performing well.   Taken to its ultimate conclusion, organizations eventually become dominated by leaders with the least capability to do their job.

Although published originally in 1969 as a tongue-in-cheek exposition on incompetence within human organizations, and supported by fictitious research, the Peter Principle continues to be debated amongst practitioners and academics.  It has been lambasted as unscientific (something it never purported to be) and crass overgeneralization, as well as an insightful source of legitimate inquiry.  The staying power of the Peter Principle maybe that its simplicity and succinctness, aligns with human experience and explains why so many organizations manage to do such stupid things.

The Value of the Peter Principle Perspective

Despite the limited academic basis for the Peter Principle, it manages to highlight a particular problem – why do we use promotion as a means of reward for competent performance (Fairburn & Malcomson, 2001)?  Doing so fails to consider two very fundamental truths: competence is domain specific, and management is a very specific skill. These fundamental truths conflict with the way most organizations reward and promote people.  Failure to acknowledge these promotes inefficiency, turmoil, and perpetuates the validity of the Peter Principle.

First, few organizations design their job families to reward and promote people for simply getting better and more efficient at the job they do.  Moving from job-specialist level 1, to job-specialist level 2, often requires doing different things, instead of doing the same things better.  We reward people, not for being good at their job, but for taking on new roles they have never done before, not proven they are capable of, and promoting constant change rather than long-term competence.   As soon as people demonstrate competence, we move them.

Second, organizations fail to realize management and leadership skills as a unique job all to themselves.  Being a good engineer says nothing about your ability to be a good engineering manager; however, good leadership skills can be a boon regardless of the function or industry. While understanding the jobs people need to perform is beneficial, leaders do not have to be competent in all the job functions they lead.  Promoting people who are competent in their job but shown no competence for leadership to positions of leadership, once again, promotes inefficiency and disruption.  Not only do you lose a competent performer in their prior role, but you may very well promote incompetent leadership.

Versatilists to the Rescue

Versatilists rarely run afoul of the Peter Principle.  First, versatilists are rarely promoted very high within most organizations, because they do not stay within any specific domain very long (something HR departments seem to think predicts success).  Second, because versatilists are deeply knowledgeable about many domains, they are keenly aware of what they are, and more importantly are not, capable of doing.  As such, versatilists without the desire or capability to lead will not pursue those opportunities.  Versatilists could be the savior for organizations looking to thwart the Peter Principle, but it will require HR to change their perspective on talent acquisition and development.

In terms of talent acquisition, HR and recruiting need to look beyond the experience requirements they believe are required for a job, and begin looking at the actual skills.  Far too often, organizations are looking for years of single domain experience (like engineering and software development) for roles that don’t necessarily require that experience (like leading engineering and software development teams).   The skills themselves are more important than the domain in which they were developed.   This is important for strategic innovation in particular, where having new perspectives brought to the job can be highly valuable.  A versatilists with leadership capability can quickly adapt to new industries and environments, while also bringing a host of new skills.

HR/Recruiting should also consider the quantity and quality of performance, rather than simply the length of performance, when looking at promotions or new hires.  Comparing two candidates for a position, a candidate who has shown success in multiple assignments and multiple environments over numerous years, should be preferred to one that has shown success in a single domain over the same time.  The candidate with multiple, differentiated success is much more likely to be successful in the new job as well; the one in a single domain is ripe to be reaching their level of incompetence.  Success in adapting to new environments is a skill companies should value, but don’t.

In terms of talent development, HR needs to create ways of rewarding specialists who do their job increasingly well over years of dedication without using promotions, while appreciating the versatilists who thrive in taking on new roles.  Promotions should not be the only means of rewarding top performers; bonuses and incentives should be used to drive continued competence building.  Promotions should only be used to expand and diversify the experiences of those already proving their ability to adapt and succeed in new roles.   HR needs to look beyond narrow definitions to find the people most likely to succeed, not those that have just been doing it longer.

As companies continue to struggle with market volatility, disruptive innovation, and dramatic shifts in business models, versatilism should be the new standard of performance.  What good is someone who has ten years’ experience in business models and practices that no longer hold true? Perhaps a new principle, the Versatilist Veracity should succeed the Peter Principle:

“Without Versatilists, a Hierarchy Tends to Become Incompetent”



Fairburn, J. a, & Malcomson, J. M. (2001). Performance, promotion, and the Peter Principle. Review of Economic Studies, 68(1), 45–66.

Peter, L. J., & Hull, R. (1969). The Peter Principle. Cutchogue, N.Y.: Willima Morrow & Co., Inc.

Follow the Leader – Followership vs. Leadership

There has been significant effort and press defining the properties and characteristics of leadership. There are probably hundreds of discrete classifications of leadership styles, each with its own unique perspective on what makes a great leader.  However, few of these approaches mention the most significant common factor: followers. A focus on followers, or why and how people follow a leader, is perhaps more instructive to the development of future leaders.

The Umwelt of Followership

Umwelt is a term used to describe the different perspectives individuals can have when viewing the same situation (Suderman, 2012).  Suderman documents the umwelton of followership as a means of understanding how perspectives of followership shape the success of those that would lead.  The umwelton documented include: position, power, situational, and partner.

Positional and power umwelton are somewhat traditional views of followership.  In each of these, the follower/leader dynamic is based on the perceptions of hierarchy and power typical of many organizations.  Leaders are defined by their roles within the organization and/or the authority they hold to induce followers to comply.  Conversely, followers perform simply because they do not have position or authority to do otherwise.  In this sense, leadership and followership have no relation to individual capabilities, only to circumstances.  Followers follow, but only through fear.

Situational umvelt defines leadership/followership based on the needs of the situation.  Much like the views of interdependent leadership (McCauley et al., 2008), this umwelt is characterized by leadership coming from the elevation of individuals based on expertise or idiosyncratic capabilities not found elsewhere. Interdependent leadership cultures are characterized as those treating leadership as a collective, collaborative process transcending any specific individual, while encompassing all individuals within the organization (McCauley et al., 2008). This idea of interdependent leadership, where leadership materializes through an adaptive, collaborative process is consistent with the descriptions of an actor-oriented scheme of organizational structure documented by Fjeldstad, Snow, Miles, & Lettl (2012). The concept of hierarchy, at least in terms of providing specific direction or work effort, is minimized. Both constructs suggest the complexity and challenges of modern markets/environments gives rise to the need for new methods of organization/leadership commensurate with these complexities.  This perspective has been famously followed by Netflix, as well as Zappos.  It’s long-term effectiveness for organizations has not been proven.

Finally, the partner umwelt is characterized, not by position, power, or situation, but by motives and intent (Suderman, 2012).  Followers choose to follow a leader because they believe in the purpose and goals the leader puts forth.  This umwelt encapsulates the idea that followers and leaders are co-dependent, but “. . . leaders can only lead when enabled by followers” (Suderman, 2012, p. 16).  Those in leadership roles may still have the position, power, or specific knowledge backing them in directing the actions of others, and still not be leaders in the minds of those they direct.  Followership is a state of mind, a true commitment to those that lead and the belief in where they are leading.  The umwelt of partner followership has a profound implication to what leadership truly is.

The Importance of Followership Perspective

The importance of understanding the umwelton of followership is critical towards becoming an effective leader.  Just being in a leadership role does not make you a leader.  Having position or power might result in people doing what you tell them, but does not necessarily make you a leader of people.  It also doesn’t mean that people will be engaged, perform their best, or go the extra mile to achieve superior outcomes.  They will simply do the least amount necessary.

True leaders focus more on the goals, the purpose, and the intent of where they are leading and convince others the destination is worth the effort.  True leaders understand that leadership is about harnessing the beliefs and desires of the entire organization towards a single goal, rather than building their own legacy. While putting the group first is not a natural tendency, it is a core requirement for building the trust necessary for true leadership (Collins, 2001; Collins & Porras, 2002; Sinek, 2014).   And, once a leader convinces others to follow, it doesn’t matter if they are in a leadership role or not.

Only followers can choose whom they follow; and, without true followers there are no true leaders.  Leaders never accomplish anything on their own.


Collins, J. C. (2001). Good to great: why some companies make the leap … and others don’t. New York, NY: HarperCollins.

Collins, J. C., & Porras, J. I. (2002). Built to last: Successful habits of visionary companies. New York, NY: HarperCollins.

Fjeldstad, Ø. D., Snow, C. C., Miles, R. E., & Lettl, C. (2012). The architecture of collaboration. Strategic Management Journal, 33(6), 734–750. Retrieved from 10.1002/smj.1968

McCauley, C. D., Palus, C. J., Drath, W. H., Hughes, R. L., McGuire, J. B., O’Connor, P. M. G., & Van Velsor, E. (2008). Interdependent leadership in organizations: Evidence from six case studies. A Center for Creative Leadership Report. Retrieved from

Sinek, S. (2014). Leaders eat last: Why some teams pull together and others don’t (Kindle). New York, NY: Penquin Group.

Suderman, J. (2012). The umwelt of followership. Strategic Leadership Review, 1(1). Retrieved from

You’re a little bit racist, and so am I.

One of the more well-known, and potentially contentious, songs from the musical Avenue Q declares everyone is a little bit racist.  What it doesn’t state is that we are all also a little bit sexist, regionalist, and nationalist as well.  We naturally identify with people who are like us and are suspicious of those who are different.  If you are travelling in a foreign country and meet up with someone from your own country, there is an immediate affinity.  If they happen to also be from the same region (state, province, whatever) that bond is intensified.  If they are from the same city, you are like long-lost friends who have found each other in a sea of unfamiliar sights and sound, regardless of any other differences (race, religion, sex, etc.). This is how human beings are wired and how we have survived as a species.

The Biology of Prejudice

Prejudice and stereotypes are part of our genetic makeup, the biology allowing our species to survive.  When our ancestors heard growling and rustling in the shadows, the immediate sense of fear and suspicion is what saved them; those that didn’t, or couldn’t, make the association between these inputs and the savage beast about to attack, didn’t survive.  The fact our ancestors survived to give rise to the current population is a testament to their natural ability to take in their surroundings, match complex patterns of association, and make sound, rationale assessments.   While those assessments may not have always been correct, it only took one instance of being correct (or seeing someone else be incorrect) to cement the association and the behavior. Continued exposure to patterns matching our expectations, solidify and codify these reactions until they become unconscious and automatic.  We have little control over it.

This is not to say that we are born specifically racist or bigoted.  It is more that we are wired to trust the familiar, and distrust the dissimilar.  We naturally find safety in similarity, and discomfort in differences.  The more dissimilar, the more discomfort.   Given a choice between aligning ourselves with those that are like us, and those that are different, we will choose similarity every time.   This is the biology of prejudice.   It is not about sex, religion, race, nationality, or anything specific, it is simply a cognitive process that seeks affinity with those most like ourselves.  We are social animals and seek similarity.  It is who we are, the way we are wired, and all of us are subject to it.

What to do About It?

If this prejudice is hard-wired into our brains, what, if anything, can we do about it?  Interestingly, telling people to quit being prejudice may have the wrong effect by focusing on the differences instead of the similarities.  However, there are a number of things that individuals, organizations, and society at large can, and should, do to combat the negative aspects of prejudice.

As Individuals

As individuals, there are two things we can do.  The first is to accept and understand our own biases, and not discard them as characteristic of low moral fiber; they are a part of us and still have value in today’s world.  If you are walking alone in a foreign city at night and see a group of locals hanging out on the street corner, maybe it is okay to have a heightened sense of awareness.  It is not inherently bad to follow our instincts and to have caution; it has kept us alive for centuries.  Maybe, just maybe, it is appropriate to take steps, like crossing the street, in order to minimize your unease.  It does not make you a bad human being.  There is a distinct difference between being cautious and going out of your way to harm those who are unlike you.  Being cautious is okay; being mean is not.

Which brings us to the second thing we can do.  If you happen to be one of those locals hanging out on the street corner and notice someone crossing the street to distance themselves, don’t be so quick to take offense.  This act, which might be labeled a “mirco-aggression”, is not aggressive; no one has done you direct harm.  You don’t know that individual, just like they don’t know you.  Prejudice works both ways and is a general stereotype, a pattern that says nothing about you as an individual or the other person.  Reacting negatively to the situation does more harm as good, because it reinforces the original, negative prejudice.  Acknowledge your own biases and show empathy for another; focus on your similarities.

As individuals, we must accept that we are all prejudiced against the unfamiliar.  It biases our view of the world, including how we interpret other people’s behavior, and words.  What we see and hear, may not be what the person actually did or said; our interpretations of reality are just as biased.

As Organizations

Diversity is an essential ingredient to organizations, as diversity is a key ingredient to the innovation that drives success.  Left to their own devices, however, diverse groups of individuals will naturally segregate themselves based on their similarity or dissimilarity with other members of the group.  This works against getting the benefits of diversity because innovation comes from not just having diverse employees, but getting them to collaborate.  There are also things organizations can do to improve this.

Organizations should find ways of fostering shared experiences and socialization for their diverse teams.  Sponsoring a bowling team, a reading club, toastmasters, or anything that can developed shared experiences will help employees do two things: 1) it allows diverse teams to get beyond inherent prejudices by engaging with individuals and discovering hidden similarities; and, 2) it creates similarities that can override other differences. As we come to see our coworkers as more similar to ourselves than others, we change the dynamics of our prejudices. Coworkers take on new shared labels, like coworker, bowling buddy, or literature lover.  Just like the travellers from the same city who meet in a foreign country, even the smallest similarities can foster connections.

Another way organizations can foster cohesiveness is by employing great leadership.  Organizations are formed for a purpose, and great organizations are effective at connecting that mission to the contributions of each and every employee. Organizations creating passion for their purpose, create an environment of inclusion and solidarity.  This simple fact, once again, creates a new kind of similarity between diverse employees: they are all champions of the organizational mission.  By encouraging an “us against the world”, the “us” becomes a new, powerful form of similarity.

If organizations want to harness the full potential of diversity, they need to focus on creating similarity.  While this is counterintuitive and often runs contrary to most organization’s diversity programs, focusing on differences will not suffice.  Organizations must seek to redefine employee perceptions through inclusion and redefining who “we” are.

As a Society

As a society, we also need to quit focussing on our differences and foster our similarities.  It is not without coincidence many Sci-Fi storylines show all of humanity coming together when aliens invade earth. This scenario clearly creates a strong definition of “us” as humans, overcoming all of our other differences. It changes our calculus of difference as  race, religion, and national origin seem pretty insignificant compared to differences in species.  And, we can learn from that.  There are two great examples from the past year or so that illustrate how we could focus more on our similarities than our differences: the “Black Lives Matter” movement, and the term “Radical Islamic Extremists”.

While any rational person should not be able to argue the statement that black lives matter (they obviously do), the movement has often generated contention because of the implication that only black lives matter.  Of course, this was not the intention of the organizers, but the resultant backlash is instructive.  By calling out labels, which focus on our differences, rather than our similarities, our biology gets in the way.  There are important issues that this movement seeks to address, and while many of them may affect one racial group more than others, solving them will not be effective when we focus on differences, rather than similarities.  More inclusive language, focused on similarities, may have been a better choice and promoted greater engagement.

A similar thing can be said for the term “radical Islamic extremist”.  Applying the label of “Islamic” immediately divides our social understanding of the issue.  Suddenly, we not only see how we are different from others because we are not radical extremists, but also because we may or may not be Islamic.  Highlighting this difference, instead of the ones that matter, does not help us work together to solve the problem.  Instead, it further divides us.  There should be no difference between how we react to Islamic extremists or Christian fundamentalist extremists.  The part that matters is “extremist” or “terrorist”, not what faith or doctrine they happen to hold. Further segmenting the issue only serves to blur who “us” and “them” are.

As a society, we need to work harder to focus on our similarities, rather than our differences.  This does not mean that we should attempt to create complete homogeneity and make all people exactly the same.  We just need to foster greater affinity between ourselves.  Only then can we truly celebrate our differences – from a place of safety and familiarity.

Coming Together

If we are going to survive as a species, we need to focus on that fact: we are all the same species.  We need to accept that we are inherently wired to be prejudiced towards people who are not like us, and foster our understanding of our similarities.  The more similarities we can find, the less the differences will matter.  Furthermore, in today’s globally interconnected world, it has never been easier to uncover our similarities.  It has never been easier for us to get beyond our prejudices and create new patterns of behavior.  If we find a way to come together and focus on our similarities, we not only make it easier to celebrate and harness our differences, but we may also find ways of eliminating negative bias for our future generations.


NetFlix: Practical Examples of People, Process, and Culture in Creating Innovation

In keeping with the traditional analysis of innovative success, a post hoc examination of an organization known for innovation provides anecdotal evidence of the impact of people, process, and culture on organizational success.  By most accounts, Netflix, Inc. (Netflix) is considered a prime example of successful innovation.  Netflix is the leading Internet-based television network and counts some 44 million customers in 40 countries streaming more than one billion hours of content (Netflix, 2014).  Since its initial public offering in 2002, Netflix has moved from an innovative provider of DVD rentals-by-mail to become the dominant player in the pure-play Internet streaming market, a market they almost single-handedly pioneered (Netflix, 2014).  Netflix has enjoyed significant growth in market share, customers, and stock valuation over the years, and the stage has been set for further growth through international expansion, strategic partnerships, and the creation of their own content (Ramachandran, 2014a, 2014b, 2015; Ramachandran & Stynes, 2015; Schwartz, 2015). An examination of key elements of Netflix’s success suggest that business models is not the only thing that Netflix has innovated on the road to becoming a household name.

One of the better-known innovations of Netflix is the organizational culture playbook they developed.  Incorporating aspects of both people and culture, the Netflix employee handbook was presented in 127 presentation slides (McCord, 2014).  From a people perspective, Netflix purports to “hire, reward, and tolerate only fully formed adults” (2014, p. 4).  Among the corporate values are the courage to speak your mind, the ability to make sound independent judgments, being curious, and being innovative (Hastings, 2009).  Hastings also suggests “adequate performance gets a generous severance package” (slide 22).  Netflix not only states a goal to hire and retain only the best people, but also sets an upfront expectation of a culture that supports innovation.  A key element in the Netflix employee methodology is a management philosophy to create a culture of freedom and innovation with employee self-discipline and freedom eliminating many of typical corporate controls like performance reviews, bonuses, and managed vacation time (McCord, 2014).  According to the founder of Netflix, “we’ve had hundreds of years to work on managing industrial firms … we’re just beginning to learn how to run creative firms” (McCord, 2014, p. 6).  McCord reports the development of a culture conducive to innovation is seen as a primary responsibility of Netflix leadership.  Netflix, as an organization, demonstrates a commitment to attracting the right people (knowledge) and fostering a culture that fosters innovation.

Interestingly, the Netflix philosophy that supports the people and culture, eschews formalized process.  According to the Netflix culture definition, process is only required when the complexity of the business exceeds the capability of the people (Hastings, 2009, slide 47).  Hastings declares process, while useful for avoiding the chaos of increasingly large organizations, a limit to the flexibility of the organization to adapt as the business environment changes.  The Netflix response is to drive the percentage of high-performance employees faster than the rise of business complexity to maintain an informal and adaptable organization.   The apparent success of this approach calls into question whether process is independent of people and culture.  It is possible an innovative culture, or superior human capital, mediates the necessity of formalized processes for the diffusion of innovation throughout the organization. It is also possible that Netflix either lacks the need for existential knowledge that would benefit from more formalized approaches to knowledge development (Wilson & Doz, 2011), or that Netflix is simply ignoring the benefits of more formalized knowledge development approaches.  Whether superior knowledge resources and culture mediates the need for more formalized processes is a provocative notion that simply underscores how little is known about how to achieve successful innovation.


Hastings, R. (2009). Netflix culture: Freedom & responsibility. Retrieved August 8, 2015, from

McCord, P. (2014). How Netflix reinvented HR. Harvard Business Review, (JAN-FEB). Retrieved from

Netflix. (2014). 2013 annual report. Retrieved from

Ramachandran, S. (2014a, November 18). Netflix sets its sights down under. Wall Street Journal (Online). Retrieved from

Ramachandran, S. (2014b, December 17). Dish Network to integrate Netflix app into its set-top boxes. Wall Street Journal (Online). Retrieved from

Ramachandran, S. (2015, February 4). Netflix to launch in Japan. Wall Street Journal (Online). Retrieved from

Ramachandran, S., & Stynes, T. (2015, January 20). Netflix steps up foreign expansion. Wall Street Journal (Online). Retrieved from

Schwartz, F. (2015, February 9). Netflix offers streaming video in Cuba. Wall Street Journal (Online). Retrieved from

Wilson, K., & Doz, Y. L. (2011). Agile innovation: A footprint balancing distance and immersion. California Management Review, 53(2), 6–26.

Is HR Sabotaging Your Innovation Efforts?

Re-post from LinkedIn from May 10, 2016

In today’s fast-paced, global economy, the traditional means of differentiation (land, capital and equipment) are becoming less differentiated and available equally to businesses large and small, old and new (Drucker, 1992; Friedman, 2006; Teece, 1998). This leaves the organization’s only means of differentiation the ability to combine undifferentiated resources together in unique ways … i.e. innovation (Lawson & Samson, 2001; Teece, 2011, 2012). Regardless of the approach to innovation you subscribe to (there are dozens, see Bowonder, Dambal, Kumar, & Shirodkar, 2010), the depth, breadth, and diversity of an organization’s people are significant antecedents to innovation success (Crook, Todd, Combs, Woehr, & Ketchen, 2011; Kim & Ployhart, 2014).  As a result, HR is a critical part of your innovation efforts.

Pre-employment assessments have been the principal tool used by HR to ensure the organization only hires the best and brightest. The use of pre-employment assessments by large U.S. organizations has increased from 26% in 2001, to 57% by 2013; eight of the top ten private employers use pre-employment testing for at least some of their positions (Weber, 2015). Unfortunately, as previously mentioned many of the traditional assessment tools have proven to be less reliable than flipping a coin when it comes to predicting future real-world performance. This realization has led to the increased use of psychological value assessments.  Value assessments attempt to match the values of prospective candidates with the value profiles of existing, high performing employees, essentially creating a way to find people who share the same values and perspectives of existing employees.  The idea is to find people who think and perform like existing top-performers. While these assessments may not be any better at predicting future performance, Weber reported on organizations reducing 90-day attrition rages from 41% to 12% in the span of only 3 years of use. Given the significant costs of hiring and training, this reduction in short-term attrition can be a significant savings for the organization. As the ease of utilizing these assessments continues to increase, the costs to utilize them decreases, they become increasingly difficult for HR organizations to ignore.

Surely, value assessments have benefit to the organization, but that value is no longer in the attracting and hiring “the best and the brightest”, and become the value of “culture” or “fit”. Even the validation of one of the most popular value assessments, the Hartman Value Profile (HVP), shows almost no correlation to real-world performance even when performance is subjectively evaluated by other members of the organization (Weathington & Roberts, 2005). Furthermore, making hiring decisions based on how well individuals “fit” within the existing organization seems at odds with the need for diverse knowledge and perspectives for effective innovation. While no one is arguing cultural “fit” is not an important aspect to collaboration and productivity, it is potentially dangerous to be seduced by the perceived benefits of values-based pre-employment assessments.

Innovation starts, and ends, with people. Decades of research demonstrate that successful innovation requires, not just the best and brightest, but also diversity in the perspectives and knowledge of those people. If everyone has the same perspective, values, and beliefs, it will be increasingly difficult to create anything “new”. If we compound this by not hiring the best and brightest (because we are more concerned with fit), the effects could be devastating.

Be wary about letting your HR practices sabotage your innovation efforts before they even get started.


Bowonder, B., Dambal, A., Kumar, S., & Shirodkar, A. (2010). Innovation strategies for creating competitive advantage. Research Technology Management, 53(3), 19–32. Retrieved from

Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. J. (2011). Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3), 443–456. doi:10.1037/a0022147

Drucker, P. F. (1992). The post-capitalist world. Public Interest, 109(Fall 1992), 89–101. Retrieved from

Friedman, T. L. (2006). The world is flat: A brief history of the twenty-first century. New York, NY: Farrar, Straus and Giroux.

Kim, Y., & Ployhart, R. E. (2014). The effects of staffing and training on firm productivity and profit growth before, during, and after the Great Recession. The Journal of Applied Psychology, 99(3), 361–89. doi:10.1037/a0035408

Lawson, B., & Samson, D. (2001). Developing innovation capability in organisations: A dynamic capabilities approach. International Journal of Innovation Management, 5(3), 377. doi:10.1142/s1363919601000427

Teece, D. J. (1998). Capturing value from knowledge assets: The new economy, markets for know-how, and intangible assets. California Management Review, 40(3), 55–79. doi:10.2307/41165943

Teece, D. J. (2011). Dynamic capabilities: A guide for managers. Ivey Business Journal Online, 1. Retrieved from

Teece, D. J. (2012). Dynamic Capabilities: Routines versus entrepreneurial action. Journal of Management Studies, 49(8), 1395–1401. Retrieved from 10.1111/j.1467-6486.2012.01080.x

Weathington, B. L., & Roberts, D. P. (2005). Validation analysis of the Hartman Value Profile. Retrieved from

Weber, L. (2015). Today’s personality tests raise the bar for job seekers. The Wall Street Journal. Retrieved from