Innovation in organization is at least equal in importance to technological innovation and product / service innovation. It tends to get less attention, which is a great opportunity for imaginative entrepreneurs to implement change for competitive advantage. Dr. Annika Steiber has studied organizational innovation for over twenty years and is a global authority. She shares her insights with Economics For Business, including her analysis of the most dramatic organizational innovation of all, Rendanheyi.

Professor Steiber’s most recent book is Leadership For A Digital World (Mises.org/E4B_170_Book1), and is her most comprehensive guide yet for business management in the digital age. She’s the author of eleven books, including The Google Model (Mises.org/E4B_170_Book2) and The Silicon Valley Model (Mises.org/E4B_170_Book3).

Her Menlo College Rendanheyi Silicon Valley webinars are available at Menlo.edu/Webinars.

Key Takeaways and Actionable Insights

Organizational innovation doesn’t get the attention it merits, even though it can contribute greatly to customer value generation.

Innovation thinking tends to focus on technology innovation and product/service innovation, with the definition of innovation as the successful introduction of new customer value to markets. Organizational innovation is not often seen through that lens. But it should be. We can reframe the problem this way: does bad organizational structure subtract from the customer value experience? We can all think of ways in which it might do so: for example, poor customer service when customer-facing employees are not empowered, and layers of bureaucracy that impede responsiveness to customer needs. In those cases, organizational innovation could readily generate improved customer experiences and enhanced customer value.

Dr. Steiber had made organizational innovation her research focus for over two decades.

There are a small number of organizational innovators, and a lot of imitators. Google has been one of the originators of new organizational models.

Many organizational innovations are pre-packaged — LEAN is an example — and implementers are following someone else’s lead. Others are long drawn out evolutions of incremental improvement without a great burst of innovation.

One example of what Dr. Steiber calls “an entirely new animal” in organizational innovation can be found in the early years of Google, which she studied first hand — she was embedded in Google as an independent researcher. She observed a different management model than anything she had seen before anywhere in the world. From this research, Professor Steiber developed six new management principles, published in her book The Google Model, and summarized in our free PDF (Mises.org/E4B_170_PDF).

Silicon Valley companies employed and expanded on the Google Model.

Dr. Steiber studies the peers of Google in Silicon Valley and found that they all adopted the Google Model and its six principles, some more slowly than others. Interestingly, her research pointed to a DNA advantage for Silicon Valley going back to the gold rush: it was a location that attracted and was populated by innovative and entrepreneurial people who were capable of building businesses and new institutions from scratch in the late 19th Century, and in the 20th Century, it was the place where Information Technology emerged, was expanded and accelerated and first put to use in business. Knowledge and knowledge flow replaced management structures and face-to-face administration, including at early pioneers such as Hewlett-Packard.

Read “The HP Way”—an early Silicon Valley organizational innovation manifesto (Mises.org/E4B_170_PDF2).

The six management principles Dr. Steiber describes are:

Dynamic capabilities.

Ability to integrate, develop, and reconfigure internal and external competencies in order to meet rapidly changing surroundings.

A continuously changing organization.

Instead of waiting and springing into action after needs become pressing, a company should ensure that its organization is permeated with a proactive approach to change.

A people-centric approach.

People-centric, focusing on the individual and liberating their innovative power and providing them with a setting in which they can express their creativity.

An ambidextrous organization.

Two different forms of organizational logic within the same organization: daily production, which works best with a conventional planning-and-control approach, and innovation, which requires greater freedom, flexibility, and a more open attitude toward experimentation. An ambidextrous organization must successfully handle and utilize the energy inherent in the contrast between these two forms of logic.

An open organization that networks with its surroundings.

Permeable boundaries and a constant and conscious exchange of information with the surroundings. Long-term survival requires that companies develop into more open networking systems.

A systems approach.

A holistic view of the system and understanding that the system can spontaneously develop new characteristics that can be difficult to predict. These new characteristics can be positive, negative or a combination of the two, creating a demand for additional measures, such as decreasing the fallout from unexpected negative system effects.

We highlighted a couple of these new management principles.

A continuously changing organization

The most successful companies are designed for constant renewal. They expect change all the time, and they lead its development. They aim for excellence on every dimension, applying three layers of expertise:

Be proactive: Search for change internally and externally. Embrace it and practice it.Experimentation culture: Try every initiative assuming that it could be a new opportunity. Mobilize fast.Don’t follow. Take the lead, change the standard, be disruptive rather than disrupted, practice creative destruction.

These companies never lose external focus, continuously monitoring developments and competitors that could disrupt them, and constantly market-testing new initiatives. They have highly developed sensing capabilities.

An ambidextrous organization

Combining the two logics of flawless daily execution for known established businesses and exploratory experimentation seeking unknown new business innovation is an organizational breakthrough. It’s a systemic view of an organization combining different kinds of leadership for the two styles, different cultural signals, different milestones, different incentives, and different evaluation criteria. One system is designed for stability and one for change.

Rendanheyi: the most radically entrepreneurial organizational innovation.

True organizational innovation is very rare, but there is a new one that Professor Steiber described for E4B called Rendanheyi.

Rendanheyi is an organizational innovation for the network age in which a large company (Haier, the Chinese company that first instituted the model has 70,000 employees) splits itself into hundreds of microenterprises of averagely 60-70 people — but could be as low as 10 or so – each enterprise performing as its own entrepreneurial business with its own P&L, its own customer base, and control over hiring, budget, and distribution of profit, and over its own value-adding line of business. Defining characteristics include:

No bureaucracy, hierarchy, or pyramid forms of organization; no managers.Employees are not referred to as such — everyone can be an entrepreneur is the mantra; they choose which microenterprise to work in. The focus is on the customer or end-user and not on pleasing the manager above. Incentive systems reward all employees for value creation, and all individual employees are constantly trying to understand how to increase value for customers. Increased value creation is rewarded, and so wealth generation is democratized.Zero distance to the end-user: this is a Rendanheyi principle that brings the consumer or customer inside the microenterprise to co-create new value in the form of new products and services and solutions. Wholesalers and retailers, for example, can inject distance between a Haier micro-enterprise and its users; the enterprise might look to digital solutions to eliminate that distance. Generally, they seek to identify barriers to zero distance to the users and get rid of them.End-user is a general term, so that those micro-enterprises that are serving other businesses rather than consumers can nevertheless practice the zero distance principle. For example, there may be a marketing micro-enterprise within Haier that serves a manufacturing micro-enterprise and a sales micro-enterprise. All can be aligned with zero distance and can work to fulfill end-users’ needs.Paid-by-user. This principle focuses micro-enterprises on end-user value by emphasizing that all businesses live or die based on whether the end-user pays them for value perceived, or not. It’s Austrian customer sovereignty in action.

The general tendency in paid-by-user is away from transactional relationships to extended relationships across multiple purchases in ecosystems and via subscriptions and memberships. Relationships are an important focus, and the focus is on creating life-time users.

A sports team on the playing field is a sound analogy for Rendanheyi. There is no central control, each team member is collaborating and combining specialized skills for a team result.

There is only limited call for corporate functions at the center of the Rendanheyi organization. There is a role for developing and furthering vision that crosses multiple micro-enterprises, and for portfolio decision-making as to where to invest resources. Some orchestration functions can be assigned to the center — for example, furthering ecosystem thinking whereby micro-enterprises serving a consumer domain such as the kitchen can develop multiple services including information services and integration services across multiple appliances, tasks, and problems for the kitchen ecosystem.

The result of the Rendanheyi model is the animation of a living system, a superorganism. Rendanheyi provides a genuinely new and different perspective on entrepreneurial organization at scale.

Additional Resources

“Six Organizational Principles for Adaptive Entrepreneurial Models” (PDF): Mises.org/E4B_170_PDF

Rendanheyi Silicon Valley Center: Mises.org/E4B_170_Rendanheyi

Menlo College Rendanheyi Silicon Valley Webinars: Menlo.edu/Webinars

Menlo College Digital Management Courses and Webinars: Executive.Menlo.edu