I have recently been asking the question of why many big companies, most of them with enough resources and great employees, fail miserably in innovating and competing in the 21st century. Why is it so difficult for them to transition from the old systems of running the business to the modern setting that powers the most valuable companies in the world?

The transition

In the dawn of the industrial era, innovation came with machines and processes that severely improved productivity. The innovation was not in what was produced - a weaver could produce the same cloth manually - but in how it was produced. And that was the basis of modern capitalism: capitalists own the means of production (the machines) and hire workers to make them produce goods that are sold in the most (financially) efficient way possible. This was obtained in a typical command-and-control system where workers obeyed rules imposed by bosses who optimized for efficiency. Since innovation inside a factory was mostly in processes and machines, employers were treated like cogs - innovating was not for them.

It is not easy to pinpoint where this started to change but certainly the Toyota Production System is a milestone of a mindset shift in how companies innovate inside the factory. This brought two new concepts to the production line: (i) producing only what is necessary avoiding waste and stock; (ii) allowing every employee to spot problems and pull the cord to stop the production line.

The first concept redefines value inside a factory and, in a more contemporary view of it, defines productivity in the sense of the value perceived and bought by the consumer. Therefore, an acute observation of the market and the clients is key to success - only spend your resources producing what is sold and avoid waste. It requires flexibility. It requires employees to be more than cogs because in different scenarios they will probably need to operate in different systems. It requires alignment of different parts of the corporation - the company needs to act as whole.

This brings the second concept - everyone has ownership of what is produced. No cogs here. People need to think about what is being made and take the appropriate actions to correct when anything wrong is spot. This brings the possibility of fast correction. People in the front line will be listened to and their feedback will bring new ways of thinking that usually will not come from the management in its “ivory tower”.

The same concepts can be extended way beyond industrial sets. Notably, the lean and agile concepts for software development apply the same mindset. Software is an interesting case because the velocity in which it evolves does not allow for the lack of innovation, and for me that is the reason why the concept of “everyone innovates” is stronger in technological companies.

Software is now everywhere. As Marc Andreesen told a few years ago, software is eating the world. There is no single industry that will escape the dynamic imposed by new technologies. Innovation in the 21st century is a matter of life and death in the business world.

And that is where the problem appears. Many businesses that could innovate slowly (or not at all) are now being replaced by fast-pacing startups. Many industries that used technology as a required-but-not-essential part of the operation now see the need to make technology the core of its businesses. But the transition is not easy. Most managers come from the command-and-control era of the operation. Hiring outsiders is not always efficient as domain knowledge is key in many industries.

What is then found is a debacle between a new necessity - innovating fast - and an old mode of management. Innovating fast requires that everyone can interfere in the system and make adjustments. That requires trust from the management. And often creates a gap between new hires - hired with the mindset of empowerment - and managers - that still behave as if the novelty and the strategy should all come from the bosses.

Command-and-control, no-control and trust

What I say is not new for those that have already seen empowered teams working. But for many this might seem weird. We were born in a hierarchical society and we have been taught that success is related to going up the social ladder - and that includes becoming the boss. So what should I do as a boss if not “commanding the troop”?

Note that I used military language on purpose. Much of this rationale comes from military parallels. This is what is called “command-and-control management”: you set the commands and ways to control that your commands are being followed. This works very well in old factories where people were cogs in the system. Our educational system was built around this concept - that is why this is so “normal” for us.

On the other side of the spectrum are teams or individuals that have no controls whatsoever. That means they do whatever they want to achieve what they think is important based on their own criteria. If you take this to the individual level this is craftsmanship - which is valuable to the person and to society but is not how a company is supposed to work.

So, what to do? I cannot describe it better than Cindy Gallop did:

“There is a formula for success in business, and it goes like this: You set out to find the very best talent in the marketplace, and then give them a compelling and inspirational vision of what you want them to achieve for you and the company. Then you empower them to achieve those goals using their own skills and talents in any way they choose. If, at the same time, you demonstrate how enormously you value them, not just through compensation, but also verbally, every single day, and if you enable that talent to share in the profit that they help create for you, you’ll be successful. It’s so simple, and virtually nobody does it, because it requires a high-trust working environment, and most business environments are low-trust. In order to own the future of your business, you have to design it around trust.”

The roadmap to disaster

I have been there. A company has historically operated in a command-and-control setting and had pretty good results. But for a while results are stagnant or declining. Someone concludes that it is because the company lacks innovation and cites a case where innovation brought results back. The company decides to go Lean, Agile or some sort of trendy word that is nice to say to investors.

So the hiring process changes to bring young talents with an entrepreneur mindset. An agile process is implemented and teams are now called squads. You get the idea. Later the CEO finds out that this did not bring the planned results. What happens is what I call the roadmap to disaster.

I like to be provocative with the term “roadmap” as it is a “map” but traditionally it has been used for command-and-control. Instead of saying “get from here to there and here is the map, take whatever path you want”, a roadmap is a series of activities set upfront that actually determine the path to be followed. So there is no need for trust, simply follow the rules and deliver on time.

I must say that companies that embrace the low trust environment and build a system around it usually do better than companies that build a system that requires high trust in a low trust environment. The latter typically brings the pattern of the roadmap to disaster. This is because the company sets up the organization around trust (squads, empowered juniors) but, at the first sign of things not going the way they predict, the top management defaults to the comfort zone of command-and-control, but now adapted to the new processes.

What happens is some version of the following. Teams are told what to do in a roadmap format and cross company projects are set up top-down. Project managers bring their Gantt charts and start to monitor the output of each squad according to the plan. And middle managers are told to lead people convincing them that they do have autonomy “within the company goals”. No surprise the turnover of talents is high and the company fails miserably in bringing the results - it is a roadmap to disaster.

It needs a cultural shift

It is not enough to change processes. The change towards true innovation requires a change in culture. People need to be trained, well paid and trusted. Managers need to understand their new role of developing employees and influencing, not commanding, people.

Yes, you need to hire talents you trust and who deliver high quality work. But that is not enough. In the end teams need to be empowered to solve important problems and find the path to impact the results. And people need to bring their authenticity to the work. They need psychological safety to contribute with their best without judgement and fear of failure - this is one of the key aspects of high performance teams as Google have shown.

Marty Cagan has a similar view on what he calls product teams vs feature teams. And when proposing a solution he claims that the most important aspect of a real product team - that brings innovation - is empowerment.

Epilogue

Many companies thrive without product innovation. You can have solid results for years in a role with command-and-control, there are plenty of examples of companies built on low trust systems that do work. But that is not how it works at tech companies and I think this is because the Schumpeterian creative destruction is nowhere more real and fast than at technology. And now software is everywhere. That is, for me, the reason why the biggest tech companies in the world are examples of stimulating innovation from everywhere. And that is why they are today the most valuable companies in the world - today “software eats” everything that refuses to innovate fast.