Rodrigo Canales on Institutional Innovation

Rodrigo Canales is the Assistant Professor of Organizational Behavior at the Yale School of Management, where he researches the roles institutions play in entrepreneurship and economic development and teaches the Innovator Perspective Course. Professor Canales is a member of the steering committee of the Dalai Lama Center for Ethics and Transformative Values at MIT as well as an advisor for several Mexican startups seeking to improve the financing environment for small firms. In this interview, Professor Canales discusses why large organizations are resistant to change and what can be done to create innovation within those organizations.

Sandy Ordonez: Obviously in the last five years we’ve seen a huge surge in the United States and probably abroad in entrepreneurship and the interest in this area by MBA graduates. Why do you think this is happening? Why are we seeing such a surge?

Rodrigo Canales: Just two quick clarifications: one is I am interested generally in entrepreneurship as a phenomenon meaning sort of traditional business entrepreneurship and the creation of new organizations. My specialty, though, is in a special type of entrepreneurship which is institutional entrepreneurship or understanding how it is that individuals generate large scale change. This can happen sort of within existing organizations and it can also be about changing just broad institutional landscapes.

When you read in my bio, for example, that I do work on institutional entrepreneurship, what it refers to is, again, the process through which individuals change complex structures.

In terms of your question about why there has been a resurgence of interest in entrepreneurship , I’m not sure. I’m actually not sure I agree that there has been such a resurgence in the interest in entrepreneurship. What I do see a big sort of surge is interest in certain types of entrepreneurship and certain types of entrepreneurial activities.

Let me say what I mean. I think there’s been a huge surge in people interested, for example, in social enterprise and in creating other businesses or NGOs or types of organizations that try to solve or address a social issue. Also there’s been a surge of interest in trying to address social issues from existing organizations or involving existing organizations in new initiatives that address social issues and it can be through technology, it can be through products or in different ways.

I think this is also very related to sort of the sudden interest that the word "innovation" and that sort of organizational and entrepreneurial innovation has also been receiving lately.

My sense is that the reason why there’s been this shift or this resurgence of these topics is because there is this recognition that some of the problems that we are facing today, some of the biggest challenges, some of the biggest problems that we see today in the marketplace, in society, in the world in general kind of have a different level of complexity than what we have observed before, and I think there’s this recognition that we need a different type of solution. I think there’s a recognition that the ways in which we are approaching problems and kinds of solutions that we are finding are just not enough and they’re not keeping pace with the rate at which the problems themselves are evolving. So, I think that people can see that the problems are kind of evolving quicker than the solutions, and so there’s this drive for people to try to figure out a better way of addressing these bigger challenges.

One quick example that I’ve been writing about and speaking about recently is around the healthcare industry. There’s a lot of impetus right now to do innovation in healthcare, and there’s all these conferences. The one thing you might ask yourself like “Why is healthcare so worried about innovation?” It seems like there’s been a lot of innovation in healthcare especially in the US in the past 20-30 years when you think about treatments, and when you think about drugs, and when you think about technology. There’s no question that it’s been an incredibly innovative industry yet I think that the recognition is that the types of problems that we are facing around healthcare today are very different in the sense that most of the innovation that has happened in healthcare so far has been sort of discreet treatments, discreet technologies to address a discreet problem. For example, how can we diagnose a particular condition, and how we can develop a drug that directly addresses that condition?

Part of the problem today is that we’re recognizing that it’s no longer about diagnosis or bringing somebody in to the ER and fixing them, and sending them out home; the biggest challenges we’re facing in healthcare today has to do with, for example, patient behavior. If you look at the chronic diseases that are truly threatening the welfare of the world like diabetes or things like these, it’s not about having the right diagnosis; it’s about how can we change patients’ behaviors because that’s what it’s going to take. The challenge of an aging population that is going to require increasing levels of healthcare, that’s a big challenge, right? And it requires a different style of solution and the recognition that the types of organizations that we have today simply cannot address the scale of the problems that we’re facing and the biggest problems that we’re facing. So, there’s this need for a new type of solution, a new type of organization, and I think that’s where this drive for innovation comes from. And we can say the same about some of the other biggest problems that we have in the world like just access to clean water, even poverty, other kinds of diseases. I think there is this recognition that we’re in different set of problems. Renewable energy is another example where it’s a similar thing that we’re recognizing that the types of organizations that exist today successful and innovative as they have been clearly are not going to help us solve the problems that we’re facing just by their nature.

Sandy Ordonez: This cultural shift that you’re describing and these changes that the marketplace are experiencing really requires a different internal structure which you touched upon. 

However as we all know, cultural shifts/changing culture can be a very painful experience and changing this is the way we do things is another painful experience. So what advice would you give to organizations that are kind of trying to do that but may not exactly know how to approach it?

Rodrigo Canales: I think that’s a very good question. It’s such a good question that that’s what my course is designed to address. It’s obviously not a simple answer, right? I think the first step is understanding why existing organizations have such a hard time innovating in the first place. I think it’s easy for us as observers watching an organization that have either missed a new technology or that doesn’t innovate quickly enough ended up going bankrupt even though they have been successful in the past, or just organization that haven’t been successful in creating new lines of business or product and changing themselves. It’s easy to retrospectively analyze what happened and say “How could they have missed it?” or “they’re just dumb” like there’s something dumb about this organization that led it to make clearly bad decisions. And I think that it’s very easy to do these things in retrospect right?

When you truly analyze why these things happen in organizations, you can recognize that there’s something in the nature of organizations that prevents them from being more innovative.

I think that’s the first step -– the first step is understanding where this resistance to innovation comes from. When you understand it, it ends up coming from precisely the fact that this organization has been successful in the past. This is the very thing that prevents it from being more innovative and challenging in some processes, because the reason why we create organizations in the first place is to perfect and to defend the very activities that have allowed it to succeed in the past. Once you build the set of processes and routines to protect and perfect what you were doing well, then those routines become, by their nature, resistant to being changed.

Once you begin there, once you start with the recognition that actually if an organization is resisting innovation, that means doing what we expect it to do. Once you recognize that, then you can start saying "Given that that’s the case, then what can I do to make sure that the same time that the organization is doing these things that we expect it to do that it’s also creating the structures and the processes that it needs to have in place so that it can be more innovative?"

One of the first things I think you need to acknowledge or to come to terms with is that because organizations are going to resist innovation naturally, then, unless innovation comes a core discipline, a core commitment within the organization, and unless the organization actually creates specific routines and processes that are geared towards innovating in parallel to the other things that the organization is doing already, then, it’s going to be very difficult for an organization to systematically achieve sort of innovation and renew itself. So it has to be a process and a set of structures that are established purposely just for the sake of making sure that you’re renewing yourself, at the same time that you’re doing what you do well.

This is a very long beginning to your answer to "Cultural change is difficult. How do you start?" Let’s imagine that I run an organization and I recognize that there’s all these structural reasons why I can’t innovate more quickly or more effectively, and I want to change that, and I want to develop a new practice and a new discipline of innovation within my firm, but I can’t expect to all of a sudden wake up tomorrow and say "All right, as of today we’re going to be innovative." That’s not going to happen, because, as I mentioned, cultural change and structural change is painful and is difficult.

Once you accept this idea of "alright we’re naturally resistant to innovation, we want to create a new mindset or a new set of disciplines", then I think the way to start is to say if I sit down and I asked the question "How can I create a culture for innovation within my organization?", that is such a huge question that it becomes immediately sort of paralyzing. Such a question that you can’t know –- there’s no other way you can answer that question in any meaningful way. But I think when you say "Alright, what kinds of little things can I do to start testing and to start developing what it would mean to become more innovative for my organization? What small, low risk things can I begin to do to start developing a more innovative culture and to start – especially figuring out what innovation should look like in my particular organization?" -- I don’t think there is a magic set of practices or processes that can travel well across organizations. Each organization is its own ecosystem and has its own sort of relationships between different parts that create that system.

And so I think that starting with a much more gradual and experimental approach and saying "Alright, for example, why don’t we start launching a competition within the organization where we’re going to say it’s an open competition. We’re going to post a problem that we’re dealing within the organization and we’re going to establish some very basic rules as to what you need to do to actually participate in this competition, right?" So, imagine that part of the rule is that for you to enter this competition you have to establish, for example, interdisciplinary teams because we do know that interdisciplinary teams are a better way to find innovative solutions to existing problems. That’s one of the rules. The other one of the rules is that it has to be like a cross-hierarchical team like you need to involve people from different levels of hierarchy. Whatever. You can start with some very simple rules, and then you set up this open competition, and there’s a simple prize and the prize can be as simple as whoever wins gets three months off of their job to try and implement this thing, for example.

So, you start with something as simple as that then you see how people relate to what you see. You see both the positive side and also the challenges that people have in engaging with this problem statement, and then you learn from that and then you try something else until maybe within a year of doing these small kind of tasks you can figure out "Alright, the way to get our people to engage with innovation in a more effective way is through these three or four things that we have learned that the people react positively to and to avoid these three or four things that we have learned our organization reacts negatively to" for example.

And so I think that taking this more gradual and more experimental approach always helps in both tackling this very complex question and also creating a path towards making these large scale changes. Does that make any sense?

Sandy Ordonez: Are there any organizations or companies that you think tackled their innovation problem in a creative way?

Rodrigo Canales: IBM is just a fantastic example, right? IBM started an incredibly innovative company. They develop amazing technology. And then, sort of they fell exactly into the trap I was describing of you’ve become so successful, you developed all these practices that actually hinder your ability to evolve into the new technologies that the market is moving towards.

What’s amazing with IBM is that they recognize that. They were humble about saying "You know what? We have a problem. We are a problem." I think they spent a lot of time just trying to figure out how to develop a discipline of innovation within the firm, and they were very experimental about it. They were very, very experimental. They ran a bunch of internal competitions. They tried out different things in different business units and in different geographies to see what works better than other things. Once they kind of figured out what seem to work at IBM then they made the transformation but it was a very thoughtful, very gradual process of testing different ideas in different places. Then, they found what works and after they made that commitment then they figured out what works in their system, they’ve made some very significant changes in their business model, in their organizational structure, in basically in all respects. Now, they’re an entirely different company they’re doing some incredible things.

Deciding to move from being a hardware company to being a service company, that in itself shows just how seriously they took this right? And within this new model of focusing on services and technology services, and bundling of technologies, they’re doing amazing things. But it was because they changed their mindset. They’ve changed what they are committed to and I think now they’re an organization that’s deeply committed to just continuously innovating. They’ve made innovation the heart of their business model instead of something that they expect is going to happen naturally.

Sandy Ordonez: It seems to me that in order to kind of make this successful is actually looking at the micro level which are the stakeholders which are employees. And as we all know as a species, sometimes the older we get the more stuck we are in a certain mindset. And considering – at least from my perspective as someone who’s her in early 30s – a lot of the workforce is coming from like a work culture where it was very top to bottom. There was this fear of failure and then you have the digital tsunami and now things are changing, things are more horizontal.

But having said that, what can companies do to kind of help people individually with fears that they may have to change or adapting to new ways of things? Are there any tactics or like kind of tips that you can offer?

Rodrigo Canales: That’s actually further removed from my expertise. I’m a sociologist and that’s more of a question for a social psychologist. The part that I can say is that as a sociologist, I actually believe that the structures in the environment that you create can greatly affect how people behave and how people feel about things in general.

One of the first things that you can do as an organization is to have a very clear map of all the elements of system that compose my organization, and that includes sort of the stakeholders that you’re talking about.

I think this first step of making sure you’re mapping your organization in a way that helps to truly observe the system, truly observe who are the people who are part of my organization, what is driving them both sort of intrinsically and extrinsically, what incentives do we have in place and how’s that driving our behavior, what are they just naturally driven by? Understand what routines you have in place and what culture you have in place in your organization by doing a thorough and vigorous analysis and this is exactly the kind of things that we teach our students here to do.

Once you have this map and you have an understanding of how everything’s related, then you can start understanding how is it that all the structural factors are actually driving behavior of my people, and therefore what are the places where I can change things? And if I want to do something here, how does that relate to the rest of the system?

Sandy Ordonez: To wrap things up, what’s the best piece of advice that you can offer young people as they’re kind of trying to enter the business world and obviously apply to business schools, trying to carve out a future for themselves?

Rodrigo Canales: That’s a big, big, big question. I mean, because your question has like four questions embedded in it, right? There’s advice for how to navigate business school. There’s advice for how to think of applying to business school. There’s advice on how you need to plan your career – all these things.

Let me tackle a simple one first. So, the biggest advice I give to my students all the time is that I think they underestimate the extent of which they can treat their business school experience as a time when they can truly experiment with new behaviors, with new career paths, with new ways of doing things themselves. I think that students come to business school, and sometimes they get too lost how hectic it is and all the…and sort of the factual things they have to work on and their busy schedule. They don’t take enough time to take a step back and reflect on what’s happening in business school, observe themselves as they’re going through business school and think about ways in which they can change their behavior or they want to modify their behavior for the future, and especially again experiment with different ways in which they can relate to other people and which they can relate with their own careers. I think students end up not learning nearly as much as they could because they don’t take enough risks with new potential career paths, with new behaviors while they’re in business school, and they don’t take enough time to reflect upon sort of themselves as part of this process. They kind of get lost in the process themselves and they don’t reflect enough on what it means for them, and what they can change the result. I think that’s limits their learning.

I think we’re partly to blame – by "we" I mean the schools – because we don’t reinforce this notion of that this is a low risk environment where part of the goal is that you’ll get to experiment with different things so that you can then sort of perfect or improve upon your understanding of some of these issues and then you can take that with you to your next job. So, I think that’s a big one.

I think that can also inform you go about choosing a business school. One of the things that you should think about is not given the career path that I see myself taking I actually think that it might change a lot in the next few years for especially like prospective students but I do think that what you didn’t know is what kinds of activities do I enjoy working on, what kinds of topics do I like, or what kinds of potential career paths that I envision for myself. Given that, which are the business schools that are going to give me the most room to experiment on these things and to learn more about the things that I thrive in, the things that I’m good at, and the things that I improve and to choose a business school based on that; not based so much on the traditional things that we choose business schools for like what’s the average starting salary of the people who come out of this school because that’s going to be hugely dependent on what job you end up working in.

At the end of the day, I think that what we’re looking for is more happiness than anything else. I think that this mindset of "Let me really think about options that I can create for myself through experimentation, through reflection of how I interact with other people and with my career." I think is a different way of thinking about it. I don’t see enough of that type of thinking in my students.