Innovation and creativity in organizational development

Innovation & Creativity

FedEx was founded as an innovator in a logistics field that had never seen overnight delivery before. The company has always positioned itself as a premium provider in the business, based on its sophisticated technology, superior network size and quality of service. However, as the company has matured, its ability to be an innovation leader is being threatened. There are a few different issues at play. The first is that, as in any mature industry, the pace of innovation is generally slow. And as the only company that genuinely seeks to position itself as premium to its competitors, FedEx is the only firm truly trying to compete on innovation. Over the years, it has had some tremendous innovation successes, pioneering the ability to maintain communication with its drivers on road, with its tracking that allows customers to see where their packages are at every step of the journey, and in the hub-and-spoke model of delivery for courier services. Every major competitor - UPS, DHL, TNT -- imitates the things that FedEx pioneered, and usually not as well.

But in an industry with a slow pace of innovation, and where most customers have a high degree of loyalty so there is relatively little new business in play, the incentive to innovate is relatively low. Furthermore, there are high costs to innovate, for a company that has hundreds of thousands of workers scattered around every corner of the globe. Rolling out a new technology for its couriers will cost FedEx many millions. Finally, there is an additional challenge in that the pace of technological innovation outside of the industry is moving faster than the pace inside the industry. FedEx took years to roll out a handheld device for its couriers, and in that time the outside world had moved from Gordon Gecko-sized Motorolas to the first iterations of the iPhone. FedEx's new technology was obsolete before it was eve completed, and grossly overpriced compared with off-the-shelf solutions that had been developed in the time it took the company to get its handheld devices rolled out.

These issues point to a problem with innovation at FedEx. Given that innovation is one of the areas where the company has traditionally extracted competitive advantage, maintaining the ability to out-innovate competitors is critical to the company's business model. Therefore, having identified that there is a need to improve the innovation processes at FedEx, it is necessary to evaluate the current state of the company's innovation pipeline and determine what steps might be taken in order to improve that pipeline.

This paper will analyze how large corporations can manage innovation, with an eye to improving the pace and quality of their innovation. FedEx makes a good example company because even though it has a past history as an innovator, it has not really been one in a long time. There are a number of reasons why this is the case, and those will be explored along with potential solutions, in the context of the prevailing academic thought with respect to fostering innovation.

Frameworks/Models

The study of innovation is relatively new in academia. It arose out of the desire to understand one of the most dynamic, valuable processes in any business. In a rapidly-changing global economic environment, any one innovation can give a company advantage, but companies that can continuously innovate are the ones that develop sustainable competitive advantage. Innovation was once studied as part of economics, but has become in recent years more psychological in nature, focused on what steps a company can take, and what systems it can implement, in order to foster a continuous flow of innovation (West & Farr, 1990). To foster innovation, first a company needs to understand what innovation is. While it is tempting to take a "you know it when you see it" approach to innovation, the point of innovation as an academic discipline is to move beyond that and formalize the definitions and explanatory theories of innovation. Sawyer (2012) explains that innovation begins with creativity as its antecedent. A creative idea is one that is original and understandable, to which Sawyer adds useful or valuable. Arguably the latter is not strictly necessary but will be for a creative idea to go anywhere in a commercial context.

With creativity as its antecedent, innovation is when a creative idea is taken through the formal development stages in an organisation. Sawyer (2012) notes that companies will tend to have pathways through which they filter new ideas, and the study of innovation as a managerial discipline focuses on the design of these pathways, how organisations are designed around these pathways, and how innovation pathways are implemented within the organisation. This is intuitive. An organisation may have the ability to generate creative, valuable ideas constantly, but without a pathway to bring those ideas to market, the innovation will fail to exist, and the creative idea will fail to add value to the organisation. If creativity is the guy sitting in the pub thinking up ideas, then innovation is when he goes to his workshop, builds the prototype, and takes it to market.

The first critical concept that can be used to understand the process of innovation is the innovation system. In any organisation, there will be a system for handling creativity, and that will be the innovation system. In some companies this system is the corporate equivalent of a failed state -- there are few good idea and the ones that do emerge are quickly quashed. In other companies, there are specific pathways that not only encourage the generation of good ideas, but evaluate those ideas and create channels by which the best ones are developed and brought to market. Sawyer (2012) highlights three thinkers and the way they describe innovation systems -- the common theme is that they are comprised of multiple institutions, working together.

Edquist and Hommen (1999)

note that innovation systems are not linear -- there are myriad external influences that affect the system, one of which is demand. At FedEx, demand is a critical problem for the company's innovation system. The industry is mature, and mature industries are typically characterized, in microeconomic terms, by a focus on process and efficiency, as the companies within the industry compete in what is essentially a zero-sum game for business. Yet, it seems reasonable that even within the framework of such competition, innovation that improves systemic efficiency, or customer service, the two most important variables, would be welcomed. The reason why innovation is taking a back seat at FedEx might be related to NESTA's (2011) public innovation capability framework, which posits that impact on performance is related to innovation capability and innovation activity. If the company believes that innovation will have little impact on performance -- that is to say that innovation activities will have a negative net present value -- then the company may constrain its innovation pipeline as a matter of policy.

Organisational culture is another key element that is discussed in innovation frameworks. Culture is related to creativity, the key antecedent of innovation, but culture will also be reflected in the innovation systems that the company has developed. Lau and Ngo (2004) argue that the role of human resources, long considered a vital link in innovation, has been overstated, which leads one to think that organizational culture is a more powerful driver. This is logic in this -- hiring gets you creativity, but the structures of the innovation system of the organisation determine what the outcomes of that creativity are. Knight and Cavusgil (2004) determined a link between innovation as a value in organizational culture and firms that are not only more entrepreneurial but better able to adapt to internationalization.

One of the issues at FedEx is that the culture is not generally geared towards innovation. The workforce is large, but is almost entirely motivated by attention to short-term efficiency. This has been built into the culture, and additional cultural influence is more on towards the status of exceptional customer service. Innovation is not promoted internally within the company. The lack of emphasis on innovation means that the culture does not promote innovation. This, naturally, will have a negative impact on the organisation overall. There is little motivation for workers to be creative, but even if they have a good idea, few have any idea what to do with such an idea. As one noted "I could tell my supervisor, but even they would have no idea what to do with the idea. Everything goes through Memphis, which is a long way from here."

The unfortunate thing about the FedEx reality is that it excludes, rather unnecessarily, the possibility for innovations would improve efficiency. The 4Ps model makes the point that there are different types of innovation -- product, process, position and paradigm (Tidd and Besant 2013). Even if the head office prefers to centralize innovation, there should be room for innovation on things like process, as there are tens of thousands of people working on processes every day, who have a high level of knowledge about their functions and might be able to contribute to the overall body of knowledge about how to perform these tasks more efficiently or more effectively. There simply is not a pathway to get a creative idea into the implementation stage. It could happen, at the station level, but there is no formal process even for that -- such innovation would be ad hoc and even if proven successful might not be expanded to the entire company.

A theory that applies in the FedEx context is that of radical vs. incremental innovation. It stands to reason that while radical innovation might have tremendous value in changing the competitive landscape in a mature industry, it is also unlikely to occur often. Incremental innovation is much more likely, and could ultimately prove to be highly valuable, as it represents exactly the sort of efficiency or effectiveness improvements that can give FedEx a competitive edge. Even saving tenth of a penny on each item shipped would have a tremendous effect over the large volume of shipments FedEx handles each day, so for this company incremental innovation can have a lot of value (Gatignon, Tushman, Smith and Anderson 2002).

Another element of an innovation system is the methods by which the organisation evaluates and validates ideas. The above interview indicates that there is no such system, as least not one that is diffused across the company. Innovation at FedEx is highly centralized, so there is a system, but nothing that is available to the average employee. This poses a roadblock for innovation, because good ideas that do not come from the centralized innovation team basically will just die -- there is nowhere for them to go. Not only is it a barrier to get an idea to Memphis, there is not pathway to make that happen anyway. Only when a local manager takes initiative -- something that is not necessarily rewarded -- will there be a direct pathway to validate an idea.

This raises the concept of incentives in the role of fostering innovation. Wages are determined centrally, which removes the incentive for workers to bring forward their creative ideas. Indeed, the average front-line worker is evaluated on performance metrics that emphasis productivity and efficiency, and these measures are reported daily. This keeps people oriented towards those objectives, rather than innovation. Likewise, lower-level managers are incentivized towards productivity, and are only marginally more empowered than front-line employees to pursue innovation as a pathway to such improvements. Haucap and Wey (2003) showed that a centralized structure performs poorly in incentivizing innovation, yet this is the structure that FedEx employs for almost all of its activities. People who work at stations away from the centralized head offices are basically caretakers of systems developed and refined elsewhere, and are incentivized to perform this role.

Primary Source Material

I have experience with FedEx, but sought out some workers and low-level managers from the company to discuss the issue of innovation. Over the course of a series of interviews, I was able to refine my knowledge of the company's innovation systems. Essentially, FedEx runs as a centralized company. Most of the major decisions are made in Memphis, with some decision-making authority being devolved out to the national head offices. There is little in the way of decision-making at the regional level. Innovation is something that is explored at the head office level, but there is a view within the company that an innovation must necessarily be rolled out at least nationwide. "When they want to do something, they have to think about doing it everywhere, not just in a city or station."

This view, unfortunately, increases the risk perception of innovation. A study of entrepreneurs found that they are more likely to take risks when they do not perceive their actions as being risky. Thus, risk perception does play a role in the willingness to take risks -- innovation by definition of trying something new is inherently risky. The greater the financial stake in a new project, the greater its risk perception. It is possible in some case to trial a new technique, but when the innovation involves investment in new technology, then the costs can be very high. Thus, FedEx managers will seek out ways to reduce the perceived risk of an innovation before proceeding. This view of risk -- FedEx is a conservative organisation by nature -- can be expected to inhibit risk-taking.

Interviews focused on the culture, and then probing to determine some of the barriers to innovation. "Nobody here thinks about innovation much," was a common theme. "I'm not paid to be creative" is another. While interviewees expressed that they are willing to participate in the creativity and innovation processes, the prevailing feeling was that innovation was not that important to the company, and that it generally arrived from head office. There was a sense within both workers and management, however, that innovation could be improved, as the company was not keeping up with the latest advances in technology. They felt the competition is in the same situation, but that FedEx should try to be the innovation leader.

Recommendations

There are three recommendations for FedEx to improve its innovation capabilities. My recommendations start at the creativity level. There is simply not a culture of creativity and idea generation, and part of that is because there are no true pathways to take an idea from a branch office to the process of idea evaluation and validation. Thus, a pathway needs to be created in order that the company not only fosters greater creativity, but that those ideas have a place to go. Right now, good ideas can easily die before being validated. Training will be required, so that lower level managers encourage ideas, and that they understand how to evaluate and validate ideas for their merits.