Want to Innovate? Find a Garage.

As garages became a standard feature following the invention of the automobile in the early 1900s, they filled another, unintended function: most houses now had a place where creative and mechanical types could go to build, tinker and invent. The most famous of garages is the one where Dave Packard and Bill Hewlett first experimented with audio oscillators in 1939. From there was born Hewlett Packard and Silicon Valley. Amazon, Apple, Disney, Mattel and Microsoft were also garage start-ups.

Garages are typically where small, independent entrepreneurs begin before they grow into successful, stable companies. In a digital economy driven by a startup culture, the garage has become the place where successful, stable companies go to learn how to be small, independent entrepreneurs – preparing for disruption or to disrupt.

A century of organisations as corporate institutions

Companies are slowly facing the fact that there is an old economy and a new economy. The old economy is institutional and incremental. The new economy is collaborative and innovative. As much as they may wish it, they can no more pick up the old economy management and drop it into the new than humans can move straight from Earth to living on Mars. The differences at the most fundamental level requires rethinking everything for the new environment.

The corporate organisation as an institution is designed for one thing: its own goals. Influential economist Milton Friedman cemented the notion that the corporation’s primary purpose is not its offering to customers. Shareholder return is not merely a goal of the corporation; it is the only reason for its existence.

Friedman argued that the “corporate executive is an employee of the owners of the business [and] the manager is the agent of the individuals who own the corporation”. This means, other than avoiding breaking laws or upsetting communities to the point of threatening the continued existence of the institution, executives and managers have no obligation to consider any factors, including the social and environmental, outside of those that serve shareholders’ rights to returns.

There is, in fact, little in the way we manage corporate institutions – top-down hierarchies, centralised decision-making, functional silos, financial reporting, management development, employee engagement – that does not trace back to serving the shareholder. It is all about maintaining control so we can deliver on the promises to shareholders.

Customers don’t care about five year strategic plans, but managers need them to convince the shareholder there will be returns on their investment. Goals have limited effect on performance and success, but without those, managers cannot demonstrate they have a plan. Key performance indicators have been oversold as a tool for managing performance, but managers need the proof they have been effective.

Aside from the rights or wrongs of the doctrine of shareholder primacy (if you think it’s wrong, you’ll enjoy this Forbes article on ‘the dumbest idea in the world‘), the management approach that supports it ensures growth (other than through acquisitions) can only be incremental.

The ‘10% approach’ is the one where each year we plan ways to ensure we can deliver some growth. We have to promise enough to keep shareholders happy, but not so much we set ourselves up to fail. Although we ideally want better than 10 per cent (or 2, or 4, or whatever – ’10’ is just the metaphoric number), we cannot make a promise that would require us to take entrepreneurial risks (faced with a choice many would rather take compliance risks they can buy their way out of, or moral risks which they can ignore). We therefore aim only to grow by the amount that is possible without relinquishing control.

Why old management will not work in the new economy

The type of capital that creates value in a digital economy is different to the physical capital that drove value creation in the old economy.

Value in the new economy is distributed value. This means we find ways to harness sources of value from others without having to control them. The capital that creates value is in the infrastructure that supports the relationship.

Technology has brought the cost of connectivity – which considering mechanics of time and coordination is one of the institution’s highest costs – down to virtually zero, allowing people and things to integrate seamlessly to create value. The more the new economy enterprise participates in collaborative efforts, the more value it can create. It recognises there will be more opportunities to collaborate outside its physical and virtual walls than it ever will within. Size, therefore, matters far less than agility – the ability to move where another collaborative opportunity exists.

The new economy enterprise seeks its direction from the market – using its purpose motive as the leverage for engaging with it – not by setting strategic plans years in advance and making internal decisions to substantiate that direction. Contrary to Milton, in the new economy purpose creates value; profits only follow if people buy into that purpose.

Additionally, digitally-enabled communications allow people to put corporate behaviour under the spotlight in ways never before possible and showing how out of step shareholder primacy is with community interests.

10% versus 10x; going back to the garage

The new economy is a ’10 times approach’. 10x acknowledges that disruption will wipe out the staid and steady far more easily than it will an enterprise already redefining itself. It knows that linear growth is more difficult as consumers have access to unlimited choices, and investments in growth bring diminishing returns. 10x means finding a new business model with a huge upside rather than squeezing drops out of the existing one. It is learning how to catch waves and ride them.

This is where the garage comes in. Established, corporate institutions are recognising their existing culture, systems, power structures, relationships, skills and mindsets mean the innovation that could lead to 10x results will be crushed before it has a chance to take hold. Instead of setting up people to do something that swims against the current, they are taking people out of the organisation and setting them up in a ‘garage’ (also known as innovation labs) where they are free from institutional norms to apply entrepreneurial thinking and startup practices to their ideas.

Microsoft Garage was set up for its employees to work on new projects and ideas. Hewlett Packard has The Innovation Garage for the same purpose. In Australia, the Westpac Bank runs two garages: one for the startup community and one for employees and partners to develop new finance products. The Commonwealth Bank now has The Lab to bring employees and clients together to innovate next generation products.

Software company, Pivotal, offers its facilities as a garage to outside companies. Visiting teams work alongside Pivotal developers in three-month ‘boot camps’ not only learn technical skills, but how to work the way Silicon Valley startups do. IBM runs the Bluemix Garage, sharing its people and technologies (including Watson) with developers, startups and entrepreneurs to create apps and use technology such as blockchain (and in the process accessing new customers and updating its old economy institutional image).

The garage is not just a place to test ideas and experiment. It is not just a place to learn and use technology. Its real value is the development of new skills for working in a vastly different new economy. The problem for organisations is that people leaving colleges and employers with up-to-date technical skills, only have the old management paradigms to take with them.

Even training developed for the world as it is and not as it was is of limited use if delivered into the old environment. More relevantly, the hyper-connected world moves so quickly that the idea you can teach someone the right moves to make at the right time is just simplistic. Garages offer an environment for people to develop tacit knowledge and learn to apply principles such as organisational values, lean, agile and validated learning, needed to compete in the new era.

The garage is where college meets workplace.

If you want a 10x enterprise, whether you are a small business or a multinational corporation, the garage is where you go to discover your inner startup.

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