A. Disaggregate the organization. Big things aren’t nimble. That’s why there aren’t any 200-pound gymnasts or jumbo-sized fighter jets. It’s also why Gore & Associates, the manufacturer of Gore-Tex and 1,000 other high-tech products, limits its operating units to no more than 200 individuals. In a company comprised of a few, large organizational units, there tends to be a lack of intellectual diversity—since people within the same unit tend to think alike. Within any single organizational unit, a dominant set of business assumptions is likely to emerge over time. One way of counteracting the homogenizing effects of this groupthink is to break big units into little ones. Big units also tend to have more management layers—which makes it more difficult to get new ideas through the approval gauntlet. In addition, elephantine organizations tend to erode personal accountability. An employee who’s one of hundreds, rather than one of a few, is unlikely to feel personally responsible for helping the organization adapt and change. (Surely, that’s somebody’s job “up there.”) For all these reasons, small, differentiated, units are a boon to adaptability. Most executives overweight the advantages of scale and underweight the advantages of flexibility—hence the enduring and often perverse managerial preference for combining small units into big ones—a preference that all too often turns lithe acrobats into lumbering giants.

B. Create real competition for resources. Businesses fail when they over-invest in what is at the expense of what could be. This happens because in most companies, well-established businesses have a distinct advantage in attracting resources. Managers trying to launch new initiatives are usually at a profound disadvantage when it comes to competing for talent and capital. In a bureaucracy, personal power is a function of the resources one controls. That’s why managers are invariably reluctant to give up headcount and cash, even when those resources might be more profitably employed elsewhere in the organization. In addition, the funding criteria for new projects tends to be highly conservative. This makes sense when making large investments in the core business, where the prudent use of data and experience can mitigate risk, but is just plain dumb for small, exploratory investments in new areas. In practice, existing businesses tend to enjoy a kind of “squatter’s rights”—only a small percentage of their budget and head count is “up for grabs” each year in the budgeting cycle.

There are several possible solutions to this problem. A company can set aside a share of its capital budget for projects that are truly innovative. In this case, a legacy business that failed to come forward with enough breakthrough projects would have a big chunk of its resources reallocated to promising new initiatives. Top management should also relax the investment criteria for small, experimental projects. Like venture capitalists, they should analyze investment risk at the portfolio level, rather than project by project. Finally, executives must also create incentives for talent mobility. For example, a manager who takes on an internal entrepreneurial role, and helps to build a new business, should be more highly rewarded than one who opts for a relatively safe caretaker role in a long-established business.

C. Multiply the sources of funding for new initiatives. In most companies there is a monopsony for new ideas. (You’ll remember that a monopsony is one buyer and a monopoly, one seller). All too often there’s only one place for an employee with a cool new idea to go for funding—up the chain of command. If the project doesn’t dovetail with the boss’ priorities or prejudices, it won’t get funded. This paucity of funding sources squelches innovation. As an analogy, imagine what would happen to innovation in Silicon Valley if there were only one venture capital firm. It’s not unusual for a would-be entrepreneur to get turned down half a dozen times before finding a willing investor—yet in most companies, it takes only one nyet to kill a project stone dead. The solution here isn’t an internal venture fund or incubator. That doubles the number of funding sources, but doesn’t go far enough. In a large company, there will be hundreds of people who have a discretionary budget of more than $100,000 per year. Imagine giving each of these individuals permission to invest 2 or 5% of their budget in any project that seems promising. Suddenly internal entrepreneurs would have dozens of “angel” investors they could tap for funding, and no longer could a single reactionary deep six a new idea. To be nimble, a company must have a resource allocation process that is more Silicon Valley than Soviet Union.

– Gary Hamel