Thomas H. Davenport and Laurence Prusak

Westinghouse Corporation was an innovative firm—at least in terms of the products and services it offered to the marketplace. The company invented the electric power plant, air brakes, the shock absorber, nuclear power, commercial radio, radar, frost-free refrigerators, and many other less dramatic innovations. Yet despite its product discoveries, Westinghouse is effectively dead as a company, its businesses dismantled and sold off.

As an interesting comparison, General Electric, Westinghouse’s competitor since the late 19th century, is one of the world’s most valuable corporations. It is known as an innovative company, but has that reputation primarily for its innovative business and management ideas, rather than its products or services. GE’s recently-retired CEO, Jack Welch, is lionized as a management genius, and his autobiography sat for months atop best-seller lists. Like Westinghouse, GE became a diverse conglomerate, and several of its businesses overlapped with Westinghouse’s: broadcasting, power generation, industrial equipment, financing, and so on. Why did GE rise to the top of the industrial heap, while its onetime powerful rival sank into the graveyard?

There are many factors that can explain the disparity in these companies’ fortunes, but one is surely their differential embrace of ideas for management and business improvement. Westinghouse had innovative products, but the only business notions it pursued involved financial analysis, acquisition and (more often) divestiture, and a late-in-the-game approach to quality. GE, particularly under Welch but before him as well, was a hotbed of managerial innovations. Earlier CEOs, such as Ralph Cordiner and Reg Jones, were just as celebrated as Welch in their time.

Of course, there are factors other than ideas and idea practitioners that account for GE’s success and Westinghouse’s demise. But there’s no denying that GE’s managerial culture was more dynamic and vibrant than Westinghouse’s at a time when investment analysts began to study companies closely. And the most financially-oriented analyst would admit that the perceived managerial vitality of a company is an important factor in its stock price. It’s difficult to prove definitively that GE was a more idea-driven and better-managed company than Westinghouse, but it certainly managed to create that impression—and to create substantially better long-term results.


Ideas and Idea Practitioners in Business


We believe that new business and management ideas are vitally important to businesses. We think managers need to care not only about the bottom line of financial outcomes, but how the organization achieves its results. We hope that more businesspeople will become personally involved in putting forward ideas in business, either to advance their own careers or to benefit their organizations. The world needs more passionate individuals who want to lead with ideas. We call these people idea practitioners.

By “ideas” we mean approaches to improving business performance and management. These are not ideas for new products or services that companies can take to the marketplace. That is an important topic, but there is much already said about it. We are talking instead about ideas that will rev up internal performance: ideas like total quality management, reengineering, knowledge management, activity-based costing, worker empowerment, balanced scorecards, and a thousand other notions with the potential to get a business in shape. Of course, some business improvement ideas can be taken to the market by companies selling services, software, or even tangible goods like office equipment. Those companies should be particularly focused on such ideas and their practitioners, because they can sell help with them to other firms.

For those managers and professionals who are already convinced of the importance of business ideas and of the value of a career as an idea practitioner, there are still many needs. What tools and frameworks can help idea practitioners do their jobs? How does one decide which ideas are most worthy of your time and attention? How can you avoid fads and bring about true change? How can others be enlisted in idea-focused initiatives? Our research has explored each of these issues.


The Functions of Business and Management Ideas


New business ideas serve a number of positive functions for organizations when they are well-executed. Like any other form of rhetoric, they can inspire and motivate both individuals and organizations to work harder and try again. New business ideas can lead to higher levels of organizational vitality and renewal. They serve as motivation for organizational change, which helps an organization adapt to its environment. Many business ideas involve a self-assessment step, in which an organization can benefit from looking at and listening to itself and how it does its work. New business ideas can energize individuals, leading them to work harder and to think more creatively. Doing the same job over and over again each day—no matter how initially interesting it may have been—can become very boring unless there are some new ideas blowing through often.

Note that we have not said that new business ideas always improve business performance. We certainly do know of many examples in which this has happened—a company successfully employs quality or reengineering or strategic planning or knowledge management, and its performance improves measurably. GE got great results with its Work-Out program, including 80% cycle time reductions in the cycle time for milling steel in Schenectady and $200 million inventory reductions in its appliance business in Louisville. Taco Bell dramatically upgraded growth and per-store revenues through reengineering. BP increased the oil exploration hit rate and reduced equipment down time through knowledge management. We could go on for pages with examples and case studies.

However, there is no empirical evidence that simply adopting new business ideas leads to stronger business performance. In fact, there is some evidence from a study by Barry Staw at the University of California, Berkeley that there is no overall relationship between ideas and performance. We’d argue that some organizations do a good job of implementing programs based on new ideas, and some do it really badly. Therefore, it’s unlikely that any overall correlation with performance would be found across multiple firms.

There are some companies that manage to use new ideas to consistently improve performance—just as they employ other managerial resources to be successful. One such company is Dell Computer, one of the leading companies of the last decade and one of the few information technology firms that has prospered even during recent hard times. Dell is not a highly conceptual firm, but rather one that uses new business ideas for one purpose: to improve its performance. At this relentless firm, ambitious goal-setting drives managers to seek better ideas both inside and outside the company. According to John Egan, an idea practitioner at Dell who heads desktop manufacturing: " We were building a new facility to manufacture desktops, where you have to improve dramatically just to stay alive. So we told the people planning the move that we needed double the people productivity and double the space productivity of the old operation. That drove them to look for technologies and approaches to meet the goals. We did things like going vertical within the factory to better utilize space, we eliminated the warehouse, and we did some very interesting work with our supply chain software and consulting partners. We encouraged engineers and production people to come up with new ideas, and we funded pilots. Pretty quickly we went from producing 120 units per hour to 700. We say that “Dell’s Law” is to do it faster, better and with less inventory."

Of course, companies that don’t see new business ideas as driving performance as Dell does will lower the average correlation between those two variables. Even for all companies combined, however, the Staw study suggests that there is a relationship between adopting new business ideas and perceived business performance. Companies that embrace new ideas are likely to have higher stock prices and to appear on “most admired” lists. Both investment analysts and the press seem to believe that companies that adopt new ideas are better companies than those that do not. One study of investment analysts suggested that 35% of their investment decision is based on nonfinancial factors, including strategy execution and the quality of strategy, management credibility, innovativeness, and the ability to attract talented people. Each of these nonfinancial factors can be strongly affected by how organizations deal with new management ideas.

There is another type of analysis for valuing business ideas that we hesitate to invoke, but will do so anyway. There are clearly differences in the degree to which national economies embrace new business ideas. The United States is the world capital of business ideas, with an aggressive idea creation industry and managers who are enthusiastic about applying business ideas. There are hundreds of business magazines and thousands of business books published every year in the U.S. The U.S. economy has done very well over the last couple of decades (notwithstanding our current slowdown), a period in which it embraced new business ideas with a vengeance. Japan, on the other hand, has not generally been an enthusiastic adopter of new business ideas, except for a strong romance with quality in the manufacturing sector. When Japan was ardently pursuing quality ahead of the rest of the world, its economy thrived. The rest of the world caught up on quality, and Japan’s economy has suffered ever since. This is certainly a simplistic relationship that we are describing, and we wouldn’t want to push it too far. We do believe, however, that the U.S. manager’s love of business ideas is at least partly accountable for the high levels of productivity and growth that the American economy experienced between 1980 and 2000. The U.S. is currently experiencing economic struggles, and there also seems to be a paucity of ideas about which managers and companies are excited. We’ll leave it to you to decide whether there’s a relationship between these two phenomena.

Business ideas, then, serve two basic roles for organizations. One is to actually improve—or try to improve—organizational performance. It doesn’t always work, but improving cost, cycle time, financial performance, market share, etc. are what new business ideas promise to organizations, and they deliver such benefits at times. The other role they play is to provide legitimacy. They indicate that an organization and the individuals within it are diligently attempting to improve their business—whether they really are or not. In a sort of organizational “Hawthorne effect,” the rest of the world notices this attempt to improve and is impressed by it.

These two objectives are compatible, as Harvard professor and organizational guru Nitin Nohria has noted. Even when a manager pursues an idea for the legitimacy it provides, he or she will still probably expect some possibility of real benefit. And the more actual performance improvement organizations receive from a business idea, the more likely it is to provide legitimacy. But early adopters of ideas are more likely to be pursuing them for real performance gains, rather than legitimacy. Only after an idea has become popular and widely-discussed in the media would it provide much legitimacy. Nohria’s research suggests that early adopters of new business ideas (Total Quality Management in his research) take up TQM when they notice problems in internal operations; later adopters are motivated more by declines in market value and investor ratings—that is, more the external legitimacy of the performance rather than internal performance expectations.

Regardless of whether you believe that pursuing new business ideas is a good approach or a poor one, most individuals have little ability to exclude them from their organizations altogether. The business ideas industry is a large and pervasive one, and unless you work in a very small or remote company, you can count on these ideas playing a role in your organization. Therefore, it makes sense to try to identify and bring in only the ideas that are of most potential benefit, and to make their impact as positive as possible. As they said in some spaceship movie, “Resistance is futile.”

Thomas H. Davenport is the President’s Distinguished Professor of Information Technology and Management at Babson, and is also the Director of the Accenture Institute for Strategic Change. Laurence Prusak is a Distinguished Scholar at Babson. This article is adapted from their forthcoming book, What’s the Big Idea: Creating and Capitalizing on the Best Management Thinking (Harvard Business School Press). Subsequent articles will describe the role of the idea practitioner and how firms lead with ideas.