There is a downside to businesses that focus heavily on standardization, optimization, and driving out variability: Such organizations leave themselves vulnerable to underinvesting in experimentation and variation, which are the lifeblood of innovation. Good experimentation helps firms better manage myriad sources of uncertainty (such as, does the product work as intended and does it address actual customer needs?) when past experience can be limiting. And it is only through such experimentation, which might include structured cause-and-effect tests, informal trial-and-error experiments, and rigorous randomized field trials, that companies can unlock their true capacity for innovation.
When W. James McNerney Jr. became CEO of 3M in the early 2000s, he quickly went about remaking the company into a leaner, more efficient version of itself. He tightened budgets, let go thousands of workers, and implemented Six Sigma, the rigorous process-improvement methodology. On the surface, McNerney’s plan seemed sensible enough. After all, such measures had worked so well at General Electric, where he served as a senior executive for more than a decade. But something was getting lost in 3M’s aggressive drive toward peak efficiency. The company, which had invented Thinsulate, Scotchgard, Post-it notes, and a host of other blockbuster products, was starting to lose its innovation edge. One telling statistic summarized the problem: In the past, one-third of sales had come from new products (released in the past five years), but that fraction had since fallen to one-quarter.1
3M is hardly alone. Many companies have been on a quest to cut waste and increase efficiency. To support that effort, they have adopted quality-control programs like Six Sigma and have encouraged managers to maximize the utilization of resources, to standardize processes, and so forth. And as the worldwide economy took a downturn in the late 2000s, those trends only accelerated. Unfortunately, as 3M discovered, methodologies that were originally designed to stamp out manufacturing variability can sometimes have unintended consequences for innovation when they are applied to the organization as a whole. Indeed, eliminating variability can also drive out experimentation, and experimentation is the lifeblood of innovation.
If anything, companies should experiment more and not less. This is true even when business slows (or, as some might argue, especially during a market downturn). Otherwise, a company’s pipeline of new products, services, and business models could dry up, leaving it extremely vulnerable to the competition. As we shall see, those companies that maintain their experimentation when business is slow will be all the more prepared when the market eventually picks up. Moreover, it is important to note that experimentation has never been cheaper. Computer simulations and rapid prototyping, for example, enable companies to run relatively inexpensive experiments that can answer myriad “what if” questions.2 Also, many companies now have a direct link to their customers, often through the Internet or other IT tools, and this enables timely feedback from various experiments. And analyzing the results of such tests can be done much more cheaply and efficiently than in the past, thanks to more powerful, sophisticated, and cheaper IT tools. Why, then, have some companies been reluctant to increase their experimentation activities?