Creativity and Innovation

????Q: Some observers say that the biggest challenge facing Chinese companies is innovation: moving up the value chain, away from simply being a low-cost, export-oriented supplier without strong brands. On the other hand, you've said that innovation may be somewhat over-rated in importance, at least in the American context, as compared with fundamental disciplines. Your thoughts on this in the context of China going forward?

????A: First of all, it's really the capacity to blend innovation and execution, creativity and discipline, that is the very special thing. It's not necessarily that you have to be more creative, or more disciplined; but that you find a way to put those together. If you're very creative, but not very disciplined, you won't go very far; and vice versa.

????Let me talk about creativity for a moment. When I first started teaching at Stanford, I had the privilege for the first two years there of teaching a course on creativity. The premise of the course was that creativity is not something that you add to people. The view was that, if you breathe, you are creative.

????Look at kids when they're five years old. They do creative things. That is, until organizations -- schools, or companies -- beat it out of them. They start out creative.

????If we look at history, the infinitely renewable resource is human creativity. We're born creative, but then we cover it up, stifle it. People do not allow their creativity to come out because they have a very strong voice of judgment: "Oh, I can't say that, that would be really stupid. Oh, I can't really try that, I might fail." Or they have the kind of severe self-criticism which prevents them from trying something creative.

????Part of the course was to focus on four things that allow you to remove the barriers to your own creativity. First, you have to have faith that you are creative. Second, you have to reduce that voice of critical judgment that prevents you from doing something that might be creative. Third, exercise your ability to ask dumb questions. And fourth, develop your ability to make precise observations of actual phenomena, and ask your own questions on what it means rather than relying on what everybody else thinks it means.

????Creativity is there all the time. We just need to remove the barriers to it.

Diversified Conglomerates: Divas or Dinosaurs?

????Q: China has many large, diversified conglomerates. You've researched and written about conglomerates versus more specialized companies. Can you comment about their strengths and weaknesses?

????A: We talked earlier about the Hedgehog Concept, where the three circles intersect: what we're passionate about; what we can be the best in the world at; and what drives our economic engine.

????I think the question about conglomerates starts with this. In other words, would a conglomerate by definition be doomed to be only average?

????I would suggest that there can actually be process Hedgehogs as well as content Hedgehogs. Sometimes that can be within a theme area, and I think that's generally best.

????Coming from our research, companies with a very diversified portfolio that nonetheless became great companies include GE, Proctor & Gamble, Johnson & Johnson, and 3M.

????If you look at the GE case, it's very hard to see one unifying theme during their best years, because over a period of time they've evolved into a lot of things. But what is GE the very best in the world at? Developing executive talent; turning good managers into great executives; and deploying them to increase profit per unit of executive talent. It's their people system, which is enormously strong, taking people from one GE business and moving them to another, so they can be successful within the GE system.

????I've often thought about what the purpose of GE is? This is a joke -- they wouldn't say this of course -- but it could be to develop CEOs for the world. To some extent this is their ultimate product: great executives. So this is an example of a company that's not just a conglomerate. What held it together was the background processes and operating systems. Think of it as if the GE system is like DOS and all the business units were applications for it, and all of them had to be compatible with it.

????GE is something of an anomaly insofar as the widely diverse range of businesses that it's in.

????Then there's Johnson & Johnson. The dynamics of each of their businesses -- pharmaceuticals, baby powder, Tylenol, sutures or artificial knees -- are very different, yet the whole thing works. It's a conglomerate around the theme of healthcare.

????Proctor & Gamble is built around a consumer package goods theme.

????If you take 3M, it's much broader than that because it's theme was the deployment of innovation, into businesses that were often seen as boring, like sandpaper, adhesives, or whatever; and yet the unifying theme was innovation.

????Is 3M a conglomerate? No, it's an innovation machine. Is GE a conglomerate? No, it's a management development machine.

????If you ask me which I would prefer, a diversified business based on a theme and content, or just the process Hedgehogs, I would say that both have worked. I like the idea of a theme, but it's clear you can succeed without it. The problem is, very few have. GE is much more an anomaly, historically.

Entrepreneurs & Company Builders

????Q: The research for your books has been focused on large companies. What relevance and what learning is there for entrepreneurs?

????A: Let's go back to "Built to Last" where we really studied some of the greatest entrepreneurs in history. It's just that later they became big companies, but we also studied them in their early, smaller days.

????We looked at Wal-Mart when Sam Walton had one dime store.

????We looked at HP when Bill Hewlett and David Packard were in a garage in Palo Alto. In fact we saw the original founding minutes of the company, prepared on a typewriter, which says they got together to form a company on August 23, 1937, in the radio technology engineering field, broadly defined, and decided to make their own stuff rather than sell other people's stuff, and then there's this wonderful line: "The question of what we will design, manufacture, and sell, however, was postponed." So you have the founding moment of this great company, and they didn't even know yet what they were going to make.

????We looked at the early days of Boeing when Bill Allen kept the business alive by going into the furniture business -- used furniture -- just to be able to generate enough cash flow to be able to make their first airplanes in the 1920s.

????We looked at the early days of Marriott when J. Willard Marriott started with an A&W Root Beer stand. That was the start of Marriott. His founding concept was to start a root beer stand. He didn't want to live in Utah anymore, so he went to Washington, D.C. to open a root beer stand.

????So we looked at all these great entrepreneurs, and a few things stood out.

????The average length of time that they were in the seat as founding architect of building a small company into a great company was 36 years; so this idea that you had a founding entrepreneur who was quickly replaced is wrong. These people were in harness for a long time. And most of them did it without a lot of outside capital.

????The notion that the greatest ones started out with tremendous advantages, had all this capital, that success came quickly, is wrong. Most overnight successes are about 20 years in the making.

????We talked about Wal-Mart, which of course is very big in China now. Sam Walton didn't open his second dime store until seven years after he started the company. Later, 25 years into the company's history, he had 38 stores. That's a lot of stores, but it took 25 years to get there.

????All of them worked really hard to get just one click on the flywheel, two clicks on the flywheel. They tended to bootstrap; they were very good with cash flow; they were building their culture from early on. And eventually all became really large companies, but it was very much a step-by-step process in most cases.

????Here's the interesting thing. We have this mental image that what you need to start a company is to have a great idea. Yet when we go back and study what made these great companies different, it is that they understood that their ultimate product was the company. From very early on they were clear that they were building a culture, building a system, a company that might evolve into different businesses, but it was the company that was their ultimate creation.

????This is very different from saying "I'm going to make a computer", or "I've got this one product idea."

????The less successful companies often had a great product idea to start with. The great companies often had some failed ideas early on, which they learned from. Because they bootstrapped and managed their cash flow and had money from family and friends, little steps eventually became the foundations of what grew into great companies.

????Almost none of these entrepreneurial successes involved someone who began with great advantages.

????Q: From listening to you I am guessing the founders were not typically motivated by an attitude of "I'm going to go out and make a zillion dollars", right?

????A: Right. They would have been happy just to pay themselves a salary at first. They were motivated by the desire to create something.