Innovation is what drives value creation for companies and their customers, employees, and other stakeholders. In today’s economy, a company can’t be excessively bureaucratic and hope to be successful in value-creating innovation. Organizational culture needs to be innovation-driven and entrepreneurial for a company to create long-term sustainable value. According to continuing research at the DePaul Strategic Risk Management Lab using the life-cycle framework, the hallmark of a failing business model stage is business-as-usual complacency and an excessively bureaucratic culture that works against innovation.
How can CFOs, finance and management accounting professionals, and board members ensure that a good innovation culture exists, and how can you evaluate and improve innovation culture in an organization? Let’s begin by defining innovation culture and then consider three companies, Reading Bakery Systems, Johnson & Johnson, and the LEGO Group, with leaders who can share insights on developing an innovation-driven culture.
WHAT IS INNOVATION CULTURE?
Innovation culture is a logical process that defines the way people think, act, and communicate to achieve successful value-creating innovation. The way people think determines their actions; their actions determine the success or failure of the company; and the way people communicate determines how well the company can articulate and execute on its innovation strategy effectively and efficiently.
Jim Collins, author of the book Good to Great, describes how great companies have disciplined people, disciplined thought, and disciplined actions. To achieve this, a common language and logic are used to develop an innovation culture. It’s important to keep the following top of mind: Innovation culture can be evaluated, and steps can be taken to develop an innovation culture. Innovation culture can be developed and learned, and CFOs, finance organizations, and board members can play a key role in this process.
READING BAKERY SYSTEMS
Reading Bakery Systems (headquartered in Reading, Pa.) is a food production systems manufacturer with four technology platforms: cracker production lines, cookie lines, fabricated chips, and baked pretzel and bread snacks. Though Reading is the number one manufacturer of pretzel and snack machinery worldwide, the organization was “going nowhere” in 2006; revenue and profits were stuck in a narrow range with no significant growth for more than a decade. Chairman and CEO E. Terry Groff discusses how the company transformed its culture to be highly innovation-driven, which resulted in breakthrough performance. (For a discussion of the Reading Bakery Systems case with Groff, see the IMA webinar “Leadership Driven Strategy for High-Performance Teams.)”
MARK L. FRIGO: Several years ago, you were invited to attend an opening lecture in my Return Driven Strategy seminar course at DePaul University by your son, an MBA/J.D. student at DePaul, and attending that lecture led to your Changing the Way We Think initiative at Reading Bakery Systems. Please share your insights.
TERRY GROFF: During the lecture, I could see how the framework could be applied to energize the strategy and culture at the company toward greater innovation. The next month, I invited you to present an intensive two-day workshop to the entire management team, with a pre-read of your [and Joel Litman’s] book Driven.
This was the launching of the Changing the Way We Think initiative at Reading Bakery Systems. At a recent CFO Summit, I presented the keynote “How to Innovate without Going Broke” in which I described how the Return Driven Strategy provided a logic and language for innovation culture at Reading Bakery Systems. Here are the takeaways from our initiative:
- A common language and logic of Return Driven Strategy are used throughout the organization, which helps us develop our innovation-driven culture.
- Key metrics are reviewed weekly and monthly; they are highly aligned with the framework.
- We support a corporate culture in which planning and execution are prized and rewarded.
- The Return Driven Strategy way of thinking is now part of the DNA of our organizational culture. Bottom line: We changed the way we thought about our business.
The Changing the Way We Think initiative resulted in double-digit annual growth in revenue and profits in the depth of the 2008-2009 Great Recession and throughout the next decade. It helped our company think differently about our customers.
FRIGO: Your innovation-thinking initiative at Reading Bakery Systems led to a breakthrough about thinking differently about your customers. Can you describe that shift?
GROFF: We started thinking differently about our customers; we stopped thinking “sales territories” and replaced that with “motivation categories”; we basically had two types of customers with distinctly different motivations. For our corporate customer where the buyer is an employee, the modus operandi was “protect my job.” So we needed to market, sell, and service our offerings with an underlying “failure is not an option” strategy; for our entrepreneurial customers, the modus operandi was “protect my money”; so we developed a sales approach where we get paid from cost savings from the project, which was highly successful. We focused increased attention on customers who highly appreciate and value what we do.
FRIGO: Your innovation culture led to a breakthrough in differentiating your company through innovation. Can you describe that shift?
GROFF: We started thinking differently about creating pricing power—recognizing the trend, especially among corporate buyers, who treat all buying as simply a “price exercise.” How can we differentiate ourselves from our competitors? How can we regain pricing power? Here are some of the things we did:
- We created a separate science and innovation center to create an innovation environment where new ideas could be tested.
- We created relationships with food science programs at colleges and universities: Penn State University, Rutgers University, and University of Guelph are good examples.
- Each year we hired a Ph.D. candidate who engaged in specific research, which resulted in a breakthrough nozzle design and breakthrough flavor chromatography, all of which had a major impact on our oven design.
FRIGO: Your experience using Return Driven Strategy thinking at Reading Bakery Systems has also been recently applied in your work as an advisor to private equity firms. Can you describe how?
GROFF: I’m still using it to help look at possible acquisition targets. The framework provides an easy, comprehensive way to evaluate a business quickly and effectively. It’s easy to see the relative strengths and weaknesses, and it provides insight into what you might need to “fix” if you end up making the acquisition at private equity firms.
JOHNSON & JOHNSON
FRIGO: In our October 2016 Strategic Finance article, “Why Innovation Should Be Every CFO’s Top Priority,” we discussed the importance of innovation for creating value for companies, customers, employees, partners, and other stakeholders. Based on your experience at the Johnson & Johnson (J&J) Innovation division, and more recently as CFO for J&J WW Pharmaceutical Research & Development division and CFO for the overall WW Pharmaceuticals, what are the key characteristics of the organizational culture at J&J Innovation and Pharmaceuticals that make it a great model for innovation-driven culture?
DARREN SNELLGROVE: Innovation is at the heart of our mission and purpose at J&J. In J&J Pharmaceuticals, it’s all about the patients. We’re focused on bringing transformational medical innovation to patients, and that’s our foundation and what motivates us every day. Innovation is our top priority. That culture of innovation within the business is infectious. In finance, that means we always want to ensure that we’re as innovative as our partners, and we aim to provide the very best financial leadership in decision analytics, pricing, cost structures, capital allocation, etc., in the most efficient and effective way we can. So, we’re highly motivated by that sense of purpose.
FRIGO: From your experience, what advice would you give to CFOs and finance and management accounting professionals in developing and supporting an innovation-driven culture in the finance organization?
SNELLGROVE: An innovation culture needs to be deeply ingrained, and it must start with the fundamentals. First, you need a clear and unwavering mission: At J&J, that’s transformational medical innovation for patients, and we ensure our finance mission is aligned. Second, you need great talent. In this case, that’s highly competent finance professionals who can perform timely, thought-provoking analysis to influence business decisions. You must develop, measure, and reward innovative (value-creating) behavior, teams, and individuals.
Third, you must try to allocate as much time and energy as possible to the most value-creating activities in support of your mission. This requires, for example, efficient and effective financial systems and processes to take care of your core operations. Fourth, you must have a set of principles from which to operate. At J&J, those principles are outlined in our credo. Importantly, the credo for us starts with patients so that our principles and mission are connected. The credo is also central to our decision making; we continually reference it as we make important decisions.
Fifth, and perhaps most important of all, you must have a deep understanding of what creates value and invest accordingly. At J&J, we firmly believe (and our results bear out) that if we create value for patients, we’ll create value for shareholders.
FRIGO: From my research on high-performance companies, we note how companies often lose their entrepreneurial spirit and become bureaucratic, which works against value-creating innovation. On a 1-to-10 scale, we evaluate how bureaucratic vs. entrepreneurial (innovative) a company’s culture is. How would you define that at J&J Pharmaceuticals? What are the characteristics you look for in evaluating the innovation culture of a company J&J partners with?
SNELLGROVE: J&J is built on a foundation of innovation. It’s a huge company, and that allows us to have tremendous global reach and impact. But innovation at scale is no easy task. Our approach is to remain agnostic to source. We innovate internally, but we also source innovation externally through collaborations with thought leaders, entrepreneurs, and various partner companies. Big companies can get bureaucratic, so we try to continually check ourselves and refine our processes to ensure that we can also move with speed and agility. In healthcare, we’re dealing with patients’ lives, so we must always make disciplined, data-driven decisions. Perhaps industry-specific, but it’s important to point out that slow doesn’t always amount to less innovation. In R&D [research and development], true innovation is often slow; true breakthroughs can take decades.
What we can do to speed things up is to do the killer experiments early so that we can fail fast. That way, we don’t spend too much time and money on nontransformational projects. In business development, we often talk about going slow to then go fast. Getting diverse input into critical decisions ahead of time can be time-consuming but allows you to move quickly when it’s time to strike and execute on a deal.
Sometimes the right level of rigor and process at the right time can actually increase speed. The key is to not let process stifle the underlying innovative spirit of the company, but rather to enhance and maximize its impact. When we evaluate external opportunities, we look for partners with similar priorities and principles: a patient-first mentality, a high bar for innovation, uncompromising ethics, and a successful track record. We look for opportunities to enhance the impact of our partners’ innovation(s).
THE LEGO GROUP
FRIGO: It’s been 10 years since we did our 2012 Strategic Finance article “Strategic Risk Management at the LEGO Group.)” What are the characteristics of the organizational culture at the LEGO Group that make it a great model for innovation-driven culture?
HANS LÆSSØE: Well, first and foremost, it’s a culture of noncomplacency. Even the most well-established processes and methodologies are addressed based on “What would it take for us to do this better?” Innovation goes way beyond products and concept—it encompasses all processes and activities throughout the company, and that was/is very much the case at the LEGO Group. One small example: The iconic LEGO 2x4 brick, which has been around since the 1950s, is still being worked on for improvement. The LEGO Group has people working on how to improve stability, sustainability, quality, and cost efficiency on this as well as all other bricks.
FRIGO: What are the characteristics you look for in evaluating the innovation culture of a company?
LÆSSØE: Innovation, in my perspective, is the ability to improve whatever you do. This can, as stated, be a product, a methodology, a process, or a way to organize or delegate power of authority. I’ve seen great examples of innovation in corporate finance processes, just to mention one potentially unexpected area. When I look for innovation characteristics in an organization, I look for three things: (1) a systematic drive for improvement; (2) a no-blame culture; and (3) a will to experiment and learn from both positive and negative outcomes.
FRIGO: I believe an innovation culture equals an entrepreneurial culture. Can you state some diagnostic questions boards of directors and executive teams should ask to ensure that a good innovation culture exists?
LÆSSØE: If by “entrepreneurial,” you mean a culture with a “focus on value creation,” I agree with your “formula.” If I were to interview a board of directors or management teams with the purpose of gauging their innovation culture, I would probably ask:
- When did you last promote an employee who did an experiment that failed but taught you valuable lessons?
- How often do you take a deliberate look at “the way you do things” and ask if this can/could be done better? (By the way, this is also embedded in the Lean concept of process thinking.)
- Is your level of product and concept development above industry standards, and how?
FRIGO: Innovation culture can be assessed, learned, and developed, and Return Driven Strategy thinking can be used to develop an innovation culture in a company as shown at Reading Bakery Systems. For the way forward for CFOs and finance organizations, use a framework like Return Driven Strategy to evaluate and develop the innovation culture at your company. And lead the way by developing an innovation culture in your finance organization.