How To Create An Innovative Culture: The Extraordinary Case Of SRI
Most efforts to change an organizational culture fail. Efforts to create an innovative organizational culture are typically even less successful. Yet some succeed. One extraordinary example is SRI International (SRI), the creator of Siri, the personal assistant on the iPhone.
In 1998, SRI was practically bankrupt with a toxic, distrustful culture. Over the next 16 years, SRI turned into a highly profitable, collaborative serial innovator, with a string of multi-million dollar innovations, like Siri. I talked recently with Curt Carlson, who was the CEO of SRI during this period. I asked him: “How on earth did you do it?”
SRI’s Situation In 1998
In 1998, when Carlson became president and CEO of SRI, it was on the financial ropes. It had been established in 1946 as a research institute headquartered in Menlo Park, California. The trustees of Stanford University formed it as a center of R&D and innovation to help support economic development in California.
Although SRI had a storied history, the management challenge in 1998 when Carlson took over as CEO was daunting. SRI had run out of money after being in slow decline for almost twenty years. If it continued on the same track, it would break its bank covenants and have to sell off its assets. It hadn’t made a profit in years. People often asked Carlson why he had even taken the job.
In earlier times, SRI had had a legendary history as inventors of the computer mouse, high-definition television, robotic surgery, and satellite broadcasting. But by 1998, its organizational culture had become dysfunctional. Carlson’s predecessors had tried tighter top-down control, but that crushed innovation. They had tried bottom-up innovation but that had led to chaos. The organization was now in a spiral of decline. Everything was going the wrong way. Lack of trust. Lack of collaboration. Failure to share resources. Ineffective operational controls. And poor financial results. SRI’s organizational culture had become so toxic that many questioned whether it could survive as an organization.
Transforming The Organizational Culture
Over the next sixteen years with Carlson as CEO, the organizational culture of SRI was transformed. SRI tripled in size, became very profitable, and created many world-changing innovations. Its best known success—Siri, the personal assistant on the iPhone—came from a company SRI created and then sold to Apple.
Under Carlson’s leadership, SRI’s culture became highly collaborative and was able to produce a series of market-creating innovations worth billions of dollars. I talked with Carlson about what was involved in the culture change at SRI. Why had he succeeded where so many others have failed? What were the elements that led to success?
Never Talk About “Culture”
Surprisingly, one key element in changing SRI’s culture is that Carlson never talked about “changing the culture.” “People are generally proud of their culture,” he says, “So if you go into an organization and say, ‘The culture of this organization needs to change!’ it makes people wonder: ‘What is he talking about? Is he saying that there’s something wrong with my culture?’ You don’t want people thinking that way. So I never once used the word ‘culture’ at SRI in any of my discussions with the staff. What I talked about was what we needed to do. Not amorphous things like “culture” that get people nervous. You stay away from words like that, which are confusing. In my talks at SRI, I had a couple of big themes. And I repeated those themes every time. But I never used the words, ‘culture change.’”
So what did Carlson talk about? Carlson arrived at SRI with the notion that inventive ideas were not enough. He set out to develop a methodology for rapid, large-scale serial innovation, starting with compelling hypotheses for both the product offering and the business model. His hypothesis was that until that was done, all efforts at technical development would be premature, if not a total waste. He had seen most efforts at innovation fail for these reasons—no customers and no business model.
His game plan included the hallmarks of the Creative Economy: focus on important customer and market opportunities; rapid, continuous team and customer co-creation; mostly self-organizing teams led by “champions”; positive human values and incentives; and a specific value-creation methodology that assures a high level of success.
But Carlson wanted to go further. He wanted to develop a playbook that would consistently generate multi-billion dollar innovations on a continuing basis.
Carlson saw that SRI had strengths on which he could build. The SRI staff were technically excellent. Like most of the companies he had worked in, the problem wasn’t the staff. The problem was the focus of the initiatives being developed (too often interesting; not important), how work was organized and managed (mostly ad hoc), and how staff worked together (mostly as individuals, not teams).
Carlson arrived with a track record of successful innovation at the Sarnoff Corporation, a subsidiary of SRI, where Carlson had initially led the development of high-definition television and a system to assess broadcast image quality, both of which were awarded Technology & Engineering Emmy Awards. He pioneered the commercialization of R&D at Sarnoff and was a champion for the use of innovation best practices as essential for systematic success.
As a result of this track record of accomplishment, Carlson had the support of his board, who knew of his work at Sarnoff and trusted that he would succeed, even if they didn’t have a deep understanding of his value-creation methods. After all, they were mainly senior operating professionals with a military background—brilliant people, but with different skills.
Carlson’s track record also gave him credibility with the staff of SRI. It helped that he had real technical achievement. He wasn’t a marketing guy or a finance whiz. He had lived the life of an innovator, and had enjoyed success at the highest levels. He had written serious technical papers. He had the kind of credibility that is important with the technical staff, who were concerned that an incoming CEO might be aiming to “dumb the place down.”
The Management Challenge At SRI
Carlson saw that he had to change the paradigm of working at SRI. The previous presidents were not bad people. They were actually terrific, highly successful people in their previous roles. They were just working on an obsolete management model. They were doing what they knew.
Carlson arrived with the notion that the way SRI was working needed to change. The shift involved focusing on important customer and market needs using a value-creation methodology that would allow SRI to deliver much higher customer value than its global competitors. The goal was simply to be the best at delivering new, high-value technical innovations. He also saw that if SRI was to be financially successful, it would need to be systematically hunting for big game—market-creating innovations with the potential of hundreds of millions of dollars of marketplace value.
Taking The First Steps
I asked Carlson what happened when he arrived and started talking like this.
“Well,” says Carlson, “some of the people just loved what I was saying, and some of them didn’t. They thought aspiring to be the best in the world was impossible but I didn’t see any alternative. I eventually replaced eight vice presidents. I didn’t fire anybody. They were all solid professionals, but they just didn’t want to work this way. Because we were basically bankrupt when I got there, we didn’t have any money to hire new people so I was working with acting vice-presidents for over three years. I now think of it with some amusement as an immersive, real-time method for learning a business!”
“At the time, I didn’t consider replacing people to be a handicap,” says Carlson. “In every case, we were able to find people who wanted to work this way. Really good people. Just tremendous people. You don’t need thousands of people today. You need a few really good people who want to work collaboratively and productively on important opportunities. When they find a place to work like that, they come and stay.”
There were some difficult moments at the start. Carlson gave me one example.
“In my first month, I got a phone call. I learned that a team had moved its laboratory from one part of the company to another without telling anybody. Imagine! I called up the vice presidents and said, ‘Do you want to undo this?’ They said, ‘No, it’s too hard to undo.” So I called a meeting that brought everyone together. I explained that from now on, we weren’t going to behave that way. If anybody did this again, the entire management chain would have to go somewhere else. We couldn’t behave this way. It sounds like really crazy stuff, because that’s what it was: really crazy stuff. When an organization has been in decline for a long time, it becomes quite dysfunctional. There was all kind of madness and team-destroying behavior going on. Every week it was something else. I could write a book just on that period. But I knew the staff was superb and that the value-creation methodology we had pioneered at Sarnoff would be transformational.”
Forming A Core Team
Carlson had a core team of partners at the start. Without that core team, he says, it couldn’t have worked. These were people who understood the value of the approach, were committed to SRI’s success, and who rolled up their sleeves. They were working sixty plus hours a week to make the right things happen. He never could have made it without them.
A key person in the core team was Norman Winarsky whom he brought in from SRI’s subsidiary, the Sarnoff Corporation, where Carlson had worked. Winarsky was one of the smartest guys Carlson had ever met. They were partners back at Sarnoff. Solid. Reasonable. Fun. Great human values. And the best brainstorming partner one could imagine. Winarsky was Carlson’s partner at Sarnoff when they created the innovation best practices Carlson brought to SRI. At SRI, Winarsky led the new ventures and licensing practice.
Another member of the core team was Bill Wilmot, at the time a professor at the University of Montana. He was one of the world’s most accomplished communication experts. He had literally written the book. He understood teams, behaviors, and knew how to communicate better than anyone Carlson had met. He taught Carlson that you couldn’t afford to get upset about certain things. You had to be firm but not get upset. You first needed to understand why people were doing certain things. Many people at SRI were acting the way they were because they loved the place and they wanted it to be successful. But things just weren’t working. It wasn’t the people’s fault. They felt helpless. They were doing the things they were doing to try to survive.
Another key person was the head of marketing and communications, Alice Resnick. Carlson teamed with her on all communications and staff engagement activities. Carlson learned from her continuously. She was extremely smart, wise, and perceptive about both staff and customer’s needs. The head of HR, Jeanie Tooker, also played a key role. She was another person with great judgment and human values. The staff trusted her. Later Len Polizzotto joined SRI as VP of marketing. He deeply understood the principles of value creation and added many fundamental concepts. Like all of these people he had superb human values.
Developing A Systematic Process For Innovation
When Sarnoff, formerly RCA Labs, became part of SRI in 1987, it took a while for Carlson to understand how to systematically create major new innovations and put the required organization in place. Carlson readily admits that he had much to learn. In big companies like RCA, efficient value-creation skills are rarely taught and even more rarely used.
Carlson’s biggest problem was that he didn’t have an efficient incubation process for creating new innovations and new ventures. “We were working hard,” he says, “but our initiatives didn’t have the quality and customer value needed to be successful. One of the biggest challenges was putting in place the organizational piece. That really is the heart and soul of the challenge. Getting people to change their attitude, their skills, and their ability to collaborate comes only from the way they work every day. That’s the big challenge and the big opportunity.”
The ideas Carlson brought to SRI were initially developed at Sarnoff with Winarsky. Every other Monday night, from 5pm to 9pm, Carlson would get together with everyone in his core team, maybe 12 to 15 people. With pizza and Coke, everyone would gather and then, one after another, stand up and give a very short value-proposition presentation for their initiative. Then the team would critique it. Everyone also had to share something they had learned about innovation, markets, or potential customers. As Carlson says, “It was a process to learn fast, not to fail fast. Failing fast is a terrible idea. The goal is always to learn fast.”
The process went on for about 18 months. They had almost no success because they didn’t know what they were doing. In retrospect, Carlson can see that they didn’t really understand innovation. They thought that they did. But in reality, they had been depending on the prestige and financial resources of RCA. These were super-smart people. But they didn’t know how to innovate on a systematic basis. For SRI, that was essential.
“The first presentations were terrible,” says Carlson, “because we didn’t know what a genuine value proposition looks like. What’s the minimum content of a value proposition? What are the minimum number of questions you must be able to answer to have a value proposition?”
Defining The Value Proposition: NABC
That’s how Carlson’s team eventually came up with what he now calls NABC – a framework that starts the creation of any innovation. They kept on trying different frameworks. And finally they said, “This is it! You’ve got to answer these four fundamental questions for any serious innovation. You can make a list of questions as long as you want, but you can’t make the list smaller than this. If you take one of these four elements away, you no longer have a serious value proposition for an innovation.”
“The four questions are, ‘What is the important customer and market need?’ ‘What is your approach to addressing this need?’ ‘What are the benefits per costs of your approach?’ And ‘How do those benefits per costs compare with the competition and the alternatives?’”
Carlson refers to these four questions as a “value proposition” or, in short, “NABC” for Need, Approach, Benefits per costs, and Competition. “They are the fundamentals; it doesn’t make sense to write up a big report until you can explain those four things in simple language to a knowledgeable person.”
Moreover it wasn’t enough to have a value proposition in the abstract. The value proposition had to be owned by a “champion” with the right mindset. This was someone who believed in the idea and who would do the hard work necessary to make the idea a success. It meant a standard catechism of commitment, teamwork, corporate responsibility, full engagement in the value-creation process, and perseverance. These elements are discussed in book that Carlson co-authored with Wilmot: Innovation: The Five Disciplines for Creating What Customers Want (Crown Publishing Group. 2006)
“We expected everyone to be the champion for their part,” says Carlson. “We avoided the terms ‘manager’ or ‘leader’ as being confusing, inappropriate, and not collaborative. Our rule was, ‘No champion, no project, no exception.’ A champion had a family of personal attributes, human values, and enviable skills, including an understanding of what it took to innovate. They were expected to be one hundred percent committed to success, whatever it took. We provided workshops to all staff so that they understood what this meant. They would have to have the essential value-creation skills, and they would have to understand why in the global innovation economy being a champion was absolutely essential. We also made it clear why it was in their best career interest to learn these skills and perform in this way.”
Conversations About Values
At the same time, Carlson was doing a great deal of communication. He did everything he could think of to get alignment. He gave innumerable talks. He visited all the teams. He held forums where they brought people together. He went to lunch with different staff in the cafeteria every day he was at SRI. It didn’t take long for everyone to know that if Carlson sat down with them they were going to have a discussion about their NABC value proposition.
They started conversations about creating a card that would encapsulate SRI values and strategies. The goal of the discussion was not to produce the card. The purpose of the card was to generate real discussions about values and strategy. If it had taken three years to develop the consensus, that would have been fine. Until they had alignment on those basic values, it was hard to move the whole organization forward. So they held meeting after meeting. They would get feedback from staff at every level. Then they would do it again. Finally the feedback stopped coming. People started staying that they liked what they were seeing. That was one milestone and it took about 18 months. Carlson wasn’t in a hurry to bring it to closure. It was about having the discussion and getting alignment on SRI’s vision going forward.
A Tipping Point
I asked Carlson whether there was any tipping point when people ealized that things were going to be different. “There was a funny moment,” he replied. “Obviously a key challenge for SRI was to make a profit. SRI hadn’t made a profit for years. So I set a goal to make one dollar of profit. I had been a professional violinist at 15 and I promised the staff to play the violin at my first-of-year all-hands presentation if we made one dollar profit. We called it ‘Make a buck.’ That may seem terribly modest, but at the time most staff thought it was impossible. Well, we did a lot better than make one dollar, but the day I played the violin was a very big deal. It was a symbol that SRI was becoming different. It was a milestone. It was a public celebration that SRI was getting back in business.”
I asked Carlson what he did in those two years to get people to buy in. Carlson says he worked mainly with the early adopters. “You never get a hundred percent,” he says. “We aimed at the early adopters. We focused on the people who wanted to work this way. You can’t convert everyone on day one. That takes many years.”
Carlson pointed out, “One essential principle in motivating professionals is to leverage productive skills and values they already have. One of the most fundamental is ‘achievement.’ Super smart people will argue with you about anything and everything. But the one thing that they insist on is the desire to achieve. It’s who they are. It’s their very identity. It was also one of the great strengths of SRI—superbly smart professionals who wanted to make major, positive contributions to the world. In every talk I gave, I started by addressing that fundamental need—doing transformational R&D and creating world-changing innovations. Then I would describe part of the “how” – our value creation process.”
A Big Win: Siri
One of the most spectacular and best-known wins was Siri. Siri is an intelligent personal assistant and knowledge navigator. It uses a natural-language user interface to answer questions, make recommendations, and perform actions by delegating requests to a set of Web services. The software adapts to the user’s individual language usage and individual search preferences with continuing use, and it returns results that are individualized. Siri was developed by SRI over a seven year period and sold to Apple in April 2010 for hundreds of millions of dollars.
Siri illustrates the power of the NABC approach. Siri was a spin-off from SRI’s Artificial Intelligence Center, and is an offshoot of the DARPA-funded CALO project, which was the biggest artificial intelligence project in American history, some $100 million.
“While we were doing the research on artificial intelligence for DARPA,” says Carlson, “we were also incubating value propositions for a number of ventures. We had four or five different ideas on the table. Siri was one of the ideas. The technical work had mostly been done but there was no business model. So we kept iterating the business model. It took two years before we finally had a good working hypothesis for the business model. Only then did we hire what we considered to be the best team for that particular value proposition. Then we iterated the business model and the product concept for another year with the team to remove additional risk. It was only towards the end of the third year that we started building prototype products to test them out. Then we set up a company, Siri Inc., and spun the company in the middle of 2009.”
“About six months later,” says Carlson, “Steve Jobs saw Siri and he invited the team to his home. We said that we didn’t want to sell. But the price got to be good enough and so eventually, the team said, ‘Okay, let’s sell the company to Apple.’”
Siri was sold to Apple in April 2010 and it has been an integral part of the iPhone since October 2011. All development efforts for non-Apple platforms were cancelled after the acquisition by Apple. Siri helped Apple transform the mobile phone market and make the iPhone the dominant “must-have” mobile phone.
It’s easy to be dazzled by the technology involved in Siri, with its conversational interface, personal-context awareness, service delegation and its speech-recognition engine.
But Carlson stresses that the key element in the success was not just the technology. It was getting the value proposition right. “We weren’t spending a lot of money while we were working on the value proposition. One of the things that changed at SRI was the realization that we needed to have a really solid working hypothesis, both for the product and the business model, before we started spending significant money on technology. That’s one of the biggest mistakes firms make. They rush ahead and try to build stuff. If we had tried to spin the company out before we had a viable business model, it would have crashed and nobody would have heard of Siri. In the 1960-1980s SRI had done that repeatedly with over twenty companies and they were mostly failures. They went out the door without a business model, and they went bust.”
“SRI was always full of brilliant people who did amazing things,” says Carlson. “But it hadn’t become systematic enough about value creation to be successful as an enterprise in today’s competitive environment. It hadn’t taken advantage of all the genius it had. We licensed the mouse to Xerox and then to Apple for almost nothing. We wouldn’t do that today. That’s not the way to run a place. That’s why SRI didn’t previously get the full credit that all the world-changing innovations it created for the world.”
The Need For Long-Term Strategies
Implicit in Carlson’s approach to being a serial innovator with multi-billion dollar initiatives is being able to have a long-term strategy. If a CEO is only going to be around for three years, what’s their interest in doing a seven year project?
“You can’t make a dent in three years,” says Carlson. “That’s a fundamental issue for many firms that chase short-term shareholder value. You don’t develop multi-billion dollar ventures in three years. And if somebody doesn’t support those major developments, it can be the end of the company.”
“You go into these big companies and you walk in the front door and it looks like the Taj Mahal, and you are expecting wonders, but you start to talk to people and you find it’s just an ordinary place with staff that aren’t motivated. They aren’t pursuing any big ideas. These companies must become profoundly more productive if they are to survive in our global innovation economy.”
“The problem is that you can’t learn how to launch billion dollar innovations just by taking a course. This is really a whole process involving a mindset with both conceptual and an experiential elements. If it’s not done experientially, the results are always poor. That’s the big challenge we are working with. How do you take these ideas and embed them in an organization? You need to have experience in how to do it. There aren’t very many of those folks that have that kind of mindset built from experience.
Seven Factors That Made The Difference At SRI
I asked Carlson to sum up what made the difference in changing the vision, organizational design, and spirit at SRI.
“First, you need a few really good partners who have the skills, values, and credibility. People who know what to do and who have the perspectives and skills that you are missing. That is essential. If you don’t have a partner, you just aren’t smart enough by yourself. You need “buddies” to help you through all the challenges. The partners can be internal or external. I had both and that was ideal.”
“Second,” he says, “Change happens in logical steps. There first must be agreement on the need to change. When you initially go into a place, people say: “What’s the need for change?” Until you have established the need, they are not ready to move.”
“When people see the need, they then ask: ‘What’s the vision?’ You are then ready to develop the vision. To gain alignment you need to do that in collaboration with the staff as much as you can.”
Third, “Once you have a shared vision, people start asking: ‘Okay, I get the need and the vision, what’s the plan?’ It’s need, vision, and plan in that order. A lot of people jump to the plan before they have the need and the shared vision. That will always get you into trouble.”
Fourth, a focus on early adopters. “Even if people kind of agree with you, most are naturally cautious. You need to find the five or ten percent who will be your early adopters who will help you establish the principles and prove them out. Typically ten percent will never agree with you but once you have the early adopters on your side, you’re on your way. It’s the champions who drive it and become role models for everyone else. One essential person at the start was Bill Mark, the brilliant VP of the information and computing sciences division. Bill immediately embraced the strategy and ran with it. His team created Siri and many of SRI’s major innovations.”
“Fifth, the language you use is critical. I never used dispiriting and misleading words like ‘culture change,’ or ‘work harder,’ or ‘fail fast’ in my discussions with SRI staff. What I talked about were the specific things we needed to do to be successful. To be heard and understood you can only have a couple of big actionable themes that can be repeated every time. You really don’t want to have more than three themes; otherwise people can’t hear you. Getting them understood is not done overnight. My themes included: a focus on important market and customer needs to make an impact, what I call now our Innovation for Impact (i4i) Playbook, and the essential role of intense, continuous team and customer iteration to learn fast and efficiently enough to succeed. In shorthand: important needs, the i4i Playbook, and continuous team iteration.”
“Sixth, continuous communication. Over and over and over. Not many messages. Just a few. Those few messages were always the same. I would always begin by talking about achievement. Doing great things. Doing important things. Making a positive difference. That’s what motivates the kind of colleagues I had at SRI. The staff was initially worried that we were going to dumb the place down or tell them how do do their work. That’s not at all what we had in mind. What we had in mind was how to accelerate and amplify their achievements, both through basic research and major marketplace innovations. The only way to do that was to liberate the genius of our teams. Over time they realized we shared their passion and were also committed to these goals.”
“If I had come and said that we are going to have to lower our standards, and turn this into a mediocre place because that’s what customers want, they would have thrown me out the door. But of course, many leaders make exactly that mistake. They don’t use those exact words, but basically that’s the message they are communicating. You see it in organizations every day. This is a terrible business strategy as well as being profoundly disrespectful of one’s colleagues. In today’s global innovation economy if you are not striving to be the best at what you do, you are going to go away—fast. At the same time, we felt we were giving our superb colleagues the additional skills they needed to thrive throughout their careers. It was win-win for everyone.”
“You lose people fast if they think you’re really not serious about achievement. That’s the thing they tested me on the most. The skeptics’ question was always some version of: ‘Are you really serious about this or is it just another management system du jour?’ As CEO I knew that I had to walk the talk more than anyone. For example, I used the same value-creation principles when I was the champion for a new innovation. People can immediately see what you actually believe through your actions. Any lack of belief, commitment, or cynicism is deadly. I said in every way I could, ‘Yes, I am serious. We are going to achieve big things. I want you and SRI to have an even bigger impact.’ Together we are going to change the world for the better. I had those conversations all the time.”
“I constantly talked about our process for value creation, what I now call the Innovation for Impact Playbook, which is built on Innovation: The Five Disciplines for Creating What Customers Want (2006). It described how to work together to achieve these goals. It included the language, concepts, and processes that encapsulated how to implement the fundamentals required for innovative success, such as champions, NABC value propositions, and value-creation forums. It included the importance of great human values. For example, a team is not going to work together with the intensity required if someone on the team is disrespectful of the others. In the global innovation economy, positive human values are increasingly essential.”
“Finally, support from the board. Keeping the support of the board is important. In my case, they liked the success that we were having even if they weren’t entirely comfortable with the way we were going about it. They would be thinking, ‘Presenting NABC value proposition every two weeks? Is this serious?’ I never found a way to get them to really understand why what we were doing was fundamental to our success.
The reason is that unless you have actually experienced it, it either sounds like a bunch of fuzzy words or it is too obvious. To someone brought up on 400 page business plans it probably doesn’t seem thoughtful and structured. It’s hard to appreciate the fundamentals of systematic innovation creation if you haven’t been a value creator yourself and been involved in implementation. At its heart, it is continuous iteration, learning based on the core principles of active learning. It’s rigorous. But if you haven’t experienced it, it’s hard to understand at a deeper level. Because these skills are fundamental, the next generation of innovators and management leaders will have to have these skills.”
Changing a culture is thus a large-scale and long-term undertaking, involving many players. Eventually all of the organizational tools for changing minds will need to be put in play. However the order in which they deployed has a critical impact on the likelihood of success.
In general, the most fruitful success strategy is to begin, as Carlson did, with leadership tools, including a vision or story of the future, cement the change in place with management tools, such as role definitions, measurement and control systems, and use the pure power tools of coercion and punishments as a last resort, when all else fails.
Frequent mistakes in trying to change culture include:
- Overuse of the power tools of coercion and under-use of leadership tools.
- Beginning with a vision or story, but failing to put in place the management tools that will cement the behavioral changes in place.
- Beginning with power tools even before a clear vision or story of the future is in place.
Note: This interview with Curt Carlson is part of my forthcoming book about the ongoing emergence of the Creative Economy.