November/December 2014

The Ingredients of Innovation

USC Marshall’s Gerry Tellis discovers what factors drive the efforts of the most innovative organizations.

Whether it’s Apple or Google, Amazon or Netflix, innovative companies establish practices that break the mold of traditional business models. But what drives these companies to be innovative, when so many others miss the mark?

That question is central to Gerry Tellis’ scholarship. As the Jerry and Nancy Neely Chair in American Enterprise and professor of marketing at the University of Southern California’s Marshall School of Business in Los Angeles, Tellis became interested in organizational innovation while he worked to identify the characteristics of successful, long-established firms.

“I found that market share, advertising, and order of market entry weren’t the key factors of long-term success,” says Tellis. He next discovered that successful companies define themselves as pioneers, but that being a pioneer itself doesn’t safeguard a company against disaster. In fact, Tellis says, “most pioneers fail because they are so happy with the results of their first entry into the market, they don’t innovate anymore.” Tellis’ research eventually led him to this conclusion: The biggest determinant of long-term success is relentless innovation.

In his 2013 book Unrelenting Innovation: How to Create a Culture for Market Dominance, Tellis discusses ill-fated companies such as HP, which introduced an e-reader in the mid-1990s, and Kodak, which developed the first digital camera in the mid-1970s. Instead of focusing on these inventions, HP and Kodak abandoned them because they refused to undermine their old models. “Their prior success caused a blindness to future innovation,” says Tellis.

He calls this failure “the incumbent’s curse,” which arises when companies possess three unfortunate traits—they focus on the present rather than the future, they insist on protecting successful products from cannibalization by new products, and they possess a systemic aversion to risk.

According to Tellis’ research, organizations that avoid these traps share three traits of their own. First, they establish incentives for innovation and reward new ideas—even if those ideas cannibalize other successful products. “These companies have strong rewards for success and weak penalties for failure,” he says. “They encourage employees to take risks.”

Second, they empower employees at all levels with the autonomy to experiment. By contrast, in many risk-averse companies, hierarchical structures require all decisions to come from the top. Too often, “only the mundane survives” in such cultures, says Tellis.

Finally, innovative companies encourage individuals within the firm to compete to produce new innovations and prototypes. “Google, Amazon, Samsung, and Apple are prototypical relentless innovators,” says Tellis. “They don’t just strive to innovate every year or every quarter—they’re doing this on a daily basis.”

For his next book, Tellis is exploring the role of innovation not just in organizations, but in entire civilizations. “I believe the rise and fall of civilizations is due not to wars, leadership, or a change in environment,” he says. “While those things play a role, I’m arguing that the rise of a civilization is primarily due to the adoption of formative innovation.”

For instance, while today’s least-developed societies, such as Cuba and North Korea, are overseen by totalitarian governments, Tellis argues that it’s not totalitarianism that holds them back. It’s their leaders’ fear of innovation. Societies that flourish do so because they embrace radical innovations, from the printing press to mass manufacturing to mobile technologies.

Like most organizations, business schools face the rise of new competitors and nontraditional models in their market. In response, says Tellis, business schools can succumb to the incumbent’s curse, or they can reward relentless innovation while embracing, and even encouraging, failure. From MOOCs to competency-based programs, new models do threaten traditional business education. But these are threats that are pushing all education providers into the next phase of education.

“I don’t think business schools or faculty need to be afraid of innovation. They need to be afraid of the lack of innovation,” Tellis emphasizes. “Just like business leaders, faculty need to focus on the future. They need to be willing to cannibalize their successes and take risks. It’s tough medicine, but it’s medicine we all have to take.”

When Silence Isn’t Golden

Employees are often a manager’s first line of defense when it comes to identifying and addressing problems on the spot. But what if employees don’t speak up when they see something wrong? Too often, that leaves the entire company’s performance at a disadvantage, according to a recent study from Elizabeth Morrison and Kelly See of New York University’s Stern School of Business and Caitlin Pan of SIM University in Singapore.

The three researchers conducted a lab experiment, a survey of healthcare workers, and a survey of employees working in a range of industries. They found that the more employees feel powerless to influence others, the more likely they are to stay silent. Of course, their silence can lead to small problems magnifying over time.

The authors emphasize that supervisors can take steps to create an environment where employees feel their initiative will pay off. For instance, they can foster work environments that show that they are open to input and direct communication from their staff. That, in turn, will make it more likely that employees ill approach them when problems first arise.

When employees remain silent even in the face of serious problems, the consequences can be disastrous, the authors write. They point to examples that range from the financial collapse of Enron and the crash of the Space Shuttle Columbia to the child sex abuse scandal at Penn State and the ignition switch failure at GM. The authors hope their study will help supervisors “understand why this occurs and how this tendency to withhold important information can be mitigated.”

“An Approach-Inhibition Model of Employee Silence: The Joint Effects of Personal Sense of Power and Target Openness” is forthcoming in Personal Psychology.

Getting from Shirk to Work

Faculty participating in X-Culture, a global virtual team project started by Vasyl Taras at the University of North Carolina at Greensboro (see “Grassroots Innovation” on page 33), are currently working on a study on the effect of “free-riders” who don’t pull their own weight on virtual teams. Although free-riding can be a problem on any team, it can be especially prevalent when team members have never met each other and have no sense of social obligation or reciprocity to each other.

A global team’s performance can plummet if just one of its members shirks his or her responsibilities, says Taras. “It’s all about the perception of injustice,” he says. “If one person on a ten-member team doesn’t do his share of the work, logic says that the team’s performance should decrease by ten percent. But our data show that when one student on a team doesn’t participate, it leads to a disproportionately large loss in performance. If two stop participating, everyone stops working because they think, ‘Why should I work if those two aren’t working and we’re all getting the same grade?’”

Using data collected from X-Culture projects, faculty already have reduced nonparticipation among X-Culture students dramatically, from 30 percent to about 3.5 percent. By employing the following strategies, Taras believes other professors can achieve the same success:

Require weekly peer evaluations. When students can evaluate their team members, “it works like magic, because students can restore a sense of justice on the team if someone isn’t doing his share of the work,” says Taras.

Give the power to exclude. Students can vote on whether a free-rider can stay on the team. The possibility of being voted off the team gives everyone an incentive to contribute, says Taras.

Cultivate cultural intelligence. After testing how factors such as team size, cultural diversity, or age affect the level of free-riding, X-Culture faculty have found that cultural intelligence plays the biggest role. Students who are culturally intelligent—who respect and can listen effectively to a diverse range of people—are much less likely to shirk their duties.

That’s why many X-Culture faculty devote up to a week in their course schedules to activities that allow students to learn about their teammates’ interests, families, and other personal information. “When people know each other, they have a sense of social obligation, which increases how much they respect each other and how much they’ll commit to accomplishing a common goal,” says Taras. “That extra time might seem unrelated to the project, but it makes a huge difference in the project’s outcome.”

Words of War May Weaken Ethics

CEOs often motivate their employees by invoking war-related language, whether they talk about “killing the competition” or “going into battle.” According to a recent paper, the good news is that such violent rhetoric makes a CEO’s own employees less likely to have ethical lapses. The bad news? When employees at competing companies hear the battle cry, they are more likely to resort to unethical tactics in order to “win.”

In one experiment, the researchers showed study participants a motivational message from a CEO of a rival company. Half saw a message that read, in part, “I am declaring war on the competition in an effort to increase our market share. I want you to fight for every customer and do whatever it takes to win this battle.” The other half saw the same message, except “war” was changed to “all-out effort,” “fight” to “compete,” and “battle” to “competition.”

Participants in the first group would be more likely to post fake negative reviews about their competitor’s product. What’s more, most failed to view such behavior as unethical.

The researchers also created a different scenario, in which participants received a message from their own manager. Once again, half of the participants saw a message that used violent rhetoric; the other half, a message that used more neutral language. In this scenario, participants were reminded that their company’s internal policy was to sell only to people whose credit scores were above 600. This time, subjects who received a message with violent rhetoric such as “making sales is a battle” and “put up a great fight” were motivated to follow internal control policies more closely, not less. This finding is “nonintuitive,” the authors write, which suggests that “violent rhetoric does indeed activate different ethical scripts, rather than simply priming aggressive behavior.”

The paper’s co-authors include David Wood, a professor of accounting at Brigham Young University in Provo, Utah; Josh Gubler, a professor of political science at BYU; and Nathan Kalmoe, an assistant professor of political science at Monmouth College in Illinois. “The world of business is replete with examples of violent metaphors,” the authors write, citing Steve Jobs’ promise to “destroy Android” and Nokia’s declaration of an “all-out war on the mobile industry.” It’s important for leaders “to understand how linguistic violence can dramatically shape ethical decision making processes.”

“Them’s fightin’ words: The effects of violent rhetoric on ethical decision making in business” is forthcoming in the Journal of Business Ethics.

The Sudden-Death Link to CEO Pay

With so many lamenting the stratospheric rise of executive compensation packages, two researchers think they have a way to indicate whether or not executives are worth the salaries they earn.

In a recent study, Bang Dang Nguyen at the University of Cambridge Judge Business School in the United Kingdom and Kasper Meisner Nielsen at the Hong Kong University of Science and Technology look at the unexpected deaths of 149 CEOs, presidents, chairmen, CFOs, COOs, and vice presidents between 1991 and 2008, each at publicly traded U.S. companies. The pair compare the reaction of the stock market for five days after the deaths with the market activity five days before.

The deaths of 63 of the executives—or 42 percent— actually triggered positive stock price reactions. The pair interprets this as an indication that these top executives received more than 100 percent of the value they created, leaving shareholders with none. For the majority of these executives—58 percent—the stock market reacted negatively to their deaths, indicating that the market felt their loss because they had brought their companies enough value to justify their salaries.

Nguyen and Nielsen also note each deceased executive’s “abnormal pay factor,” which they define as actual compensation minus the expected compensation of the individual’s replacement. They find that, on average, fairly compensated CEOs take home 65 cents—and other executives, 71 cents—of every dollar they created for shareholders.

Nguyen and Nielsen suggest their research is especially relevant to regulators who want to take steps to limit CEO compensation. If 58 percent of top executives are compensated fairly and are doing a good job for their stakeholders, says Nguyen, “enacting regulation that punishes all CEOs alike also punishes the company, the shareholders, the taxman, and ultimately the ordinary citizen.”

Nguyen and Nielsen also note that ompanies should take great care in hiring not just their CEOs, but their entire executive team. All companies should have a number of competent executives who can take the lead in a worst-case scenario, so that shareholders are not at the mercy of one person’s fate.

“What death can tell: Are executives paid for their contributions to firm value?” is forthcoming in Management Science.

Minorities Face Unexpected Hurdles

Two recent studies highlight the unexpected— and sometimes counterintuitive—obstacles facing women and ethnic minorities in business:

One paper confirms that minority entrepreneurs are treated differently than Caucasian entrepreneurs by U.S. lending institutions, even when other factors such as age, attractiveness, clothing, and experience are controlled. Its co-authors include Sterling Bone of Utah State University’s Huntsman School of Business in Logan; Glenn Christensen of Brigham Young University’s Marriott School of Management in Provo, Utah; and Jerome Williams of the Center of Urban Entrepreneurship & Economic Development at Rutgers University in New Brunswick, New Jersey.

The researchers sent three black, three Hispanic, and three white smallbusiness owners to banks in a culturally diverse U.S. metropolitan area to request the same information about loans. All knew basic business and banking terminology, and all were similar in age, body build, attractiveness, and education level. The researchers found that lenders asked black and Hispanic entrepreneurs to provide more information and offered them different levels of information than they did the white entrepreneurs.

In another experiment, a group of consumers were asked to apply for loans; each application was rejected. “In general, when minority consumers were rejected they saw it as a threat to their self-esteem,” Bone says. “Caucasian entrepreneurs shook off the setback and often saw it as evidence of bad judgment on the part of those making the decision.” Although entrepreneurial success can be an “uphill battle,” he adds, the hill is that much steeper for minorities.

“Rejected, Shackled, and Alone: The Impact of Systemic Restricted Choice on Minority Consumers’ Construction of Self” appeared in the August 2014 issue of the Journal of Consumer Research.

Several studies have found that minority managers can be reluctant to hire and promote other minorities, supporting the belief that minorities who have “made it” view those in the pipeline as unwanted competition. But that conclusion fails to recognize the complex position minority managers find themselves in, say David R. Hekman, assistant professor of management and entrepreneurship; Maw Der Foo, associate professor of management and entrepreneurship; and doctoral student Wei Yang of the Leeds School of Business at the University of Colorado in Boulder.

Hekman, Foo, and Yang analyzed data and peer assessments involving 362 high-level executives registered in a course at a leadership training center. Fourteen percent of the executives were nonwhite, and 31 percent were female. In peer assessments, white males seen as valuing diversity received high ratings for warmth and performance. But for women, the same trait correlated to lower ratings in those areas; for nonwhites, it negatively correlated to perceptions of competence.

In an experiment, the researchers divided 395 university students into four groups and asked them to view a set of presentations delivered by actors and actresses playing the part of an HR manager advocating for one of four job candidates—either a white male, a white female, a nonwhite male, or a nonwhite female. In each scenario, presenters noted that all were equally qualified, but that the organization wanted to advance diversity. When surveyed afterward, the students penalized the women and nonwhite managers who advocated for minority candidates, but not the white male managers.

Because white males seem immune to this penalization, they could be asked to play larger roles in promoting diversity, the authors suggest—this goes against common practice, in which organizations often choose women and nonwhites to direct diversity offices.

ratings for minority and female leaders?” was presented at the Academy of Management’s August annual meeting in Philadelphia, Pennsylvania.