That’s not exactly the question a couple college professors ask in a new booked called, “The Physics of Business,” but it might as well have been. The authors suggest the forces of scale and efficiency are trumping innovation at U.S. companies of which Walmart is the largest.
The topic of size being a deterrent to innovation has never been more relevant as Walmart approaches the $500 billion mark. On its journey to becoming the largest company in the world, Walmart has consistently promoted a view that it remains a nimble organization thanks to a culture that embraces change and encourages risk taking.
However, in “The Physics of Business Growth,” authors Ed Hess and Jeanne Liedtka, suggest that today’s large companies are driven by a focus on operational excellence, which requires a strict adherence to low-variance execution. The problem, according to Hess, is that such a focus often kills innovation and the ability for U.S. companies to explore and experiment with new growth ideas. He suggests many companies stifle innovation without even realizing it and doing so hinders their competitiveness in a global marketplace.
Hess is professor of business administration and Batten Executive-in-Residence at the Darden Graduate School of Business, University of Virginia. He also has written 10 books. His co-author, Jeanne Liedtka, is the United Technologies Corporation Professor of Business Administration at the Darden Graduate School of Business and former strategy consultant at Boston Consulting Group and chief learning officer at United Technologies.
“Today’s companies are structured based on scale, efficiency, and execution. With such rigid structures in place, it can be difficult to move any growth initiative through an organization, let alone create groundbreaking innovation,” Hess said. “Growth exploration and innovation are inherently messy and seemingly inefficient, the complete opposite of how big corporations want to run, and they don’t and won’t happen overnight. That is a very hard pill to swallow in today’s ‘do more with less’ environment.”
In their book, Hess and Liedtka present more than 15 years’ worth of research on how successful new growth actually happens in organizations and strive to help readers understand how to create growth in today’s business environment where there is a tendency among large organizations to promote stability.
Most companies think their primary purpose is to produce linear, reliable, predictable, and standardized low-variance results, according to the authors. And the bigger the companies the more powerful the forces of conformity and low variance. In these organizations, the culture, processes, measurements, and rewards are designed and aligned to produce what Hess and Liedtka call the “physics of stability.”
“Wall Street’s maniacal view is that companies should grow in an ever-increasing, linear manner evidenced by increasing quarterly earnings,” Hess said. “Institutional shareholders, by and large, own the vast majority of public company stocks for 12 months or less. They’re more like stock ‘renters’ than owners. Add to this the short average tenure of public company CEOs who are paid significantly through short-term stock options and you end up with a capital markets system that inhibits growth and innovation.”
That’s because growth exploration and innovation are not short-term phenomena, they take time, they are not predictable or linear; and they are high-variance, according to Hess.
To address the situation and jump start innovation requires challenging some familiar assumptions. Most notably that efficiency and scale rule the day and that all things must be certain. For example, the culture, behaviors, processes, measurements, rewards, and tolerance for failure needed to drive operational excellence are fundamentally different from those needed to create innovation, which requires an emphasis on exploration and invention, according to Hess.
“Operational excellence strives for 99% defect-free performance. Contrast this to growth experimentation that can result in failure rates of 90 percent,” Hess said. “In operational excellence environments, managers are rewarded for stamping out variance. Yet, in growth environments, variance is the norm. In fact, innovation is a high-variance activity. The mindset, culture, and processes that drive successful execution in an existing business can, if unexamined, drive innovation into the ground, exhausting and discouraging the very people who are trying hardest to accomplish it and killing inventive ideas before they see the light of day.”
The book’s central theme - to be innovative companies must be willing to accept failure – won’t sound very innovative to anyone who has been around Walmart for any length of time. A willingness to fail and the experimentation it encourages is the hallmark of any retailer who has enjoyed enduring success. The more pertinent question as it relates to Walmart is whether the company is failing often enough to be uncovering new innovations.