We often talk about innovation in products, services and manufacturing. Innovation in management practices could get a potent tool in changing the entire competitive landscape and provide a long lasting competitive advantage. This article talks about how innovation in management practices help with the help of some examples.

Recently, I came across Value statement of a large FMCG organization and was intrigued by the Value of Innovation where it also covered Innovation in management practices. Often, we see innovation is restricted to R&D, Process and Products. When I started to search for more information on Innovation in Management practices, to my surprise I found there was not much. There is a huge amount of literature on Innovation management practices though. Would like to talk about this topic by sharing some examples from the past.

What constitutes management practice

Management practice refers to the set of work methods and processes used by Managers to improve effectiveness across the organization.

Main areas of Management practice are Communication, leading by example, setting goals and demanding performance, Measurement & correction and Strategic planning. Some of the tools that are used to achieve this objective are Forecasting, Benchmarking, Performance monitoring, in short management practice determines how the organization can implement its ideas and plan

What is Management Innovation

Gary Hamel in his HBR article titled The Why, What, and How of Management Innovation Defines management innovation as “a marked departure from traditional management principles, processes, and practices or a departure from customary organizational forms that significantly alters the way the work of management is performed. Put simply, management innovation changes how managers do what they do. And what do managers do?”

To qualify for management innovation, it should question the current principles, should be systemic (covering all areas of the organization) and part of ongoing innovation process.

How it helps?

Management innovation has the potential to create a long-standing competitive advantage and cause a tectonic shift the competitive landscape of the industry. What makes this unique is the difficulty in copying these innovations by others as there is a source ambiguity. That is what exactly cases the competitive advantage is very difficult to narrow down because a combination of factors helps the cause. Let us see what few organizations have done in the past which are a called innovation in management practices

• To make cars cheaper so that everyone could buy, Ford introduced assembly line manufacturing which helped them assemble same type of cars faster with fewer people. This helped them make cars affordable
• Could you make money out of an intangible asset? P&G had the answer by their Brand management strategy. They built multiple brands (house of brands) and each of it clocks Billions in revenue
• When faced with quality issues, Motorola came up with Six sigma to reduce defect levels which soon became a benchmark
• When GSK saw their product pipeline was dry, they had to do something urgent to be in market. Dr Tachi Yamada(then head of R&D) adopted focused research which he called as Centers of Excellence (COE) based on therapeutic area which helped them work on specific molecules with a small group of dedicated scientists.

From the above examples, you could see that innovation in management practice is a systemic effort in the organization in which all functions are involved and it helps the organization address a pressing issue. The competitive advantage these organizations enjoyed lasted long. But this needs continuous improvement without which it results in competitive parity.

The Grameen bank innovation

I was fascinated by the management innovation by Grameen bank, a micro lending bank based in Bangladesh. Started by Dr Muhammed Yunus in 1983, this microfinance bank is a very profitable bank that provides loan to poor population who do not have any credit history or could not furnish any collateral. How did they manage to do?

The bank is founded with few strong principles which are;

• Poor people do not create poverty rather poverty is generated by the institutions and the policies surrounding these people
• Problem of poverty cannot be solved through charity as charity leads to dependency
• Poor people have equal ability like any other people in the society and their inner energy/creativity need to be utilised
• Person who has less gets more credit (unlike conventional banking which works the other way)
• Poor people will pay back on time
• More important to lend to women who bring more benefits to their families

The basic idea of providing credit is not for consumption but for improvement in the quality of living by creating self-employment. Loans were sanctioned for specific purposes like building house, higher education. They used social capital as a collateral and borrowers were required to form groups of 5 members. Loans were sanctioned to the group but paid to individuals in such way that the member who had the least gets the loan first. For others to continue to get the credit, the member who borrowed loan had to make timely repayments. This created a moral pressure on them.

The bank had created a trusting relationship at three levels as given below;

• Bank and employee – The vision of the bank was to improve quality of life of poor people by making them self-employed. So they needed only those employees who were passionate about this vision. Selection process was stringent, and they had a 6 month training program which only 50% of the entrants could pass. What makes the bank stand out is their performance evaluation system. The branch that had just 100% repayment was classified as green which was the lowest ranking. The top rank of Red star was given to the branch where their customers not only crossed the poverty line but also achieved the set parameters like a house, access to clean drinking water, all children going to school etc.
• Bank (Employees) and their Borrowers – At every branch the employees interacted with their prospective borrowers to understand their plans and the reason for applying for a loan. They also took efforts to understand the business model and challenge the assumptions. They realize that their job is not just to lend and collect money. The performance evaluation system mentioned above, ensured that the employees really cared for the wellbeing and upliftment of their borrowers. This created a trusting relationship between the bank and its borrowers
• Relationship between borrowing groups – Obtaining a loan from the bank was a collective effort and hence repayment too was a collective responsibility. This creates a peer pressure. The neediest in the group gets the loan first while the leader of the group gets last. Disbursals are based on repayment track record. This created a mutual interest in other members of the group

About 95% of the roughly 9 million borrowers are ladies and their on time repayment rate in above 97% with defaults being very rare. Also this is a very profitable bank that has stopped accepting donations as they are able to manage their finances through deposits (from the same set of borrowers). They also offer loans to beggars who could take up some business like selling some products to augment their income. This bank and its founder received the 2006 Nobel peace prize (first Nobel prize for Bangladesh).

Conclusion: As you could see form the Grameen bank example, an innovation in management practice runs across the organization and helps it stay close to this purpose and sustain their competitive advantage. If another bank had to acquire this competitive advantage, they had to copy numerous things Grameen bank was doing and had to do it better than how Grameen does. This would take lot of time and money. Every organization needs to constantly look for areas in innovation management practices and also find ways to sustain them. I am reminded of a quote by Thomas A Edison which goes like this, “There is a way to do it Better-Find it”. Let us find it.

About the author: Mr. Pattabiraman Nagarajan is a HR professional, Consultant, trainer and an ICF certified coach. Has managed organization change and aligned HR practices to ensure business growth. He holds master degree in Social work and a PG diploma in Business management from IIM Trichy. He could be reached at npattabiraman@relyonus.in

References –
• Social Capital and Microfinance : The Case of Grameen Bank , Bangladesh, by Dewan Mahboob Hossain
• The Why, What, and How of Management Innovation by Gary Hamel
• Making sense of Management Innovation – Julian Birkinshaw and Michael Mol