For many, if not most, businesses, success is not just about achieving targets, it is about outperforming the market. And what outperformance requires is difference: achieving competitive advantage through doing something more, or better, or just different, than competitors. All firms strive for this to some extent, but what distinguishes organisations is how they approach this task. For many years there have been four basic ways to do this, but over the last two years, a new, fifth way has emerged, and is promising to radically improve firms’ ability to drive outperformance.
The Four Basic Solutions
The first approach to outperformance is to just do it spontaneously. Innovative strategic choices may come out of annual planning processes, or improvements may be identified during the day-to-day activity of the business. It happens, and may even be incentivised, but it is not planned for.
A second way involves targeted structural solutions: the creation of Research & Development or Innovation divisions or teams, which can either be permanent, or project-based. The research and innovation teams commonly found in pharmaceutical and technology firms are good examples of this.
The third way is a cultural one, where firms take deliberate action to change how everyone in the business behaves, to make innovation and improvement a core part of how they operate, day-in, day-out. Formalised, continuous improvement programmes such as TPS (the Toyota Production System), Kaizen and Lean are examples of this.
Finally, the fourth way involves leadership solutions, which aim to enhance leaders’ ability to drive innovation and improvement. These are like cultural solutions, in that the end goal is a change in how people behave across the organisation. But whereas cultural solutions involve training large section of a firms’ people, leadership solutions focus on smaller groups of key leaders.
There has been a noticeable shift in the popularity of these approaches over the years. With the relative downturn of the last decade and increases in both the pace of change and perceived volatility, firms have shifted away from spontaneous approaches. Innovation teams have become more popular, as have interventions aimed at changing employee behaviour. Yet it hasn’t been easy.
Structural solutions have achieved mixed success, with investments in innovation teams achieving unreliable returns. However, cultural and leadership solutions have also encountered issues. Cultural solutions tend to either be very complex and expensive, or they try to minimise cost through being light-touch, and thereby end up being unreliable in genuinely shifting behaviours. Leadership solutions, meanwhile, have reliability problems of their own. First, they touch upon just a small group of leaders, so they rely on these leaders to successfully embed and cascade new behaviours through their areas. Being indirect like this, their impact inevitably varies. Second, they generally provide leaders with new skills, models or processes for driving innovation and improvement, but tend to ignore the fact that no one way will always work: that every team and every situation is slightly different and so requires a different approach. So again, their impact varies.
The Fifth Solution
Now, however, a fifth solution is emerging. It mitigates the challenges faced by the other approaches and involves a hybrid of cultural and leadership solutions. The concept it all hinges on is that of leadership impact.
It is easy to think of the impact that leaders have as being direct – that they directly drive performance through their behaviour. In fact, it is the basis of leadership solutions. They teach leaders new ways of behaving, in the assumption that if leaders apply these new behaviours then they will drive innovation and improvement. Unfortunately, no one way will always work, as the actual impact that leaders’ behaviour has depends upon the qualities and characteristics of their teams, the business situation they are in, and the broader cultures of the business, industry and country they operate within.
This then is the reality of leadership: that the higher-level leaders become, the more their impact becomes indirect. It becomes less about what they themselves are able to achieve, and more about how the working environment that they create helps or hinders their people to achieve things. In recent years, research has shed new light on the types of environment that leaders can create and the elements of it that are most important for driving innovation and improvement. And this is what the fifth solution builds upon.
Rather than focusing on teaching leaders new skills or better ways to behave, these new impact solutions focus on the working environment that leaders create and the impact that this has on the ways their people behave. They use special feedback tools to assess leaders’ impact on others, and then development solutions that focus on improving this impact in ways that drive innovation and continuous improvement. Yes, at some point this involves looking at how leaders behave, but the key focus is on the actual impact they have.
Impact solutions thus avoid the trap of one-size-fits-all training solutions. Instead of promoting a single way of behaving to everyone, they focus on a single desired outcome and then show leaders different ways to achieve this. They also avoid the issue of only involving a relatively small subset of a firm’s population, by effectively bringing leaders’ teams into the room by proxy. Impact solutions may only physically involve a certain number of leaders, but their core focus is not just the leaders in the room, but also their direct reports and the impact that leaders have on them. So rather than just involving X number of leaders, they involve X number of leaders plus the number of direct reports they have.
Moreover, the importance of looking at the actual impact that leaders have and not just the ways in which they behave, can be seen in recent research into firms’ abilities to accurately gauge the impact that leaders have. A study of over 1000 senior leaders has shown that businesses consistently tend to misjudge and over-rate leaders’ ability to create a positive working environment. And the elements of that environment that they are most likely to over-rate are those most important for driving a culture of innovation and continuous improvement.
Initial research into the success rates of this fifth way to achieve outperformance through driving innovation and improvement is still at an early stage. But early results suggest that these impact solutions are having a dramatic effect on firms’ ability to drive genuine and sustained changes in employee behaviour. Businesses finally have a new tool in their armoury.
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