How Companies Get Smart
Plenty of corporations say they want to improve the way they do business. But few really do what it takes to succeed.
By Jeffrey Pfeffer

(Business 2.0) – Companies are a lot like kids—precious few are born smart. Most acquire intelligence by learning basic tasks, mastering them, and then moving on to learn more advanced skills. To succeed over time, organizations have to continuously innovate and improve.

You already know this, of course; the phrase "continuous improvement" has become so common in corporate America that it's practically a cliché. Far less intuitive, however, are the management techniques that allow companies to develop their collective intelligence. Harvard Business School professor Amy Edmondson and her colleagues recently studied health-care workers to better understand the challenges associated with acquiring new knowledge in complex, results-oriented organizations. Her work is fascinating because the insights she gleaned contradict both conventional wisdom and the patterns of employee behavior that many companies encourage and celebrate.

For example, most companies value employees who take it upon themselves to solve problems without comment or complaint. In a hospital, if a nurse finds an unmade bed, the intuitive "best" response—taking individual initiative—involves fetching linens and making the bed. For a software programmer facing an unexpected coding glitch, the equivalent response would be to develop a quick "workaround" patch that keeps a project moving forward.

So should you start handing these self-starting workers "employee of the week" awards? Hardly. As anyone steeped in the lessons of the total quality movement will tell you, solving problems quietly and independently is the worst possible way for your staff to respond if you want to improve business processes. That's why Toyota, Business 2.0's "Smartest Company of 2004" (see page 65), does things differently. When a Toyota car comes off the assembly line with a paint defect, the answer isn't to fix the problem so neither the customer nor the factory manager notices; the best response is to identify and remedy the root cause of the problem so it won't happen again. Instead of rewarding the quiet fixers, smart companies encourage noisy (but substantive) complainers who perform a critical service by bringing quality issues to the fore.

Edmondson's research generated another counterintuitive result. Yes, eliminating layers of workplace supervision is consistent with an emphasis on efficiency, individual empowerment, and worker accountability. But for purposes of organizational learning, it's counterproductive. Removing managers leaves front-line people with more to do—and much less time to reflect on and learn from experience. Second, managers usually have broader perspectives and more connections to other parts of the company, so they often see where problems originate and how they might be solved. In a study of Southwest and American Airlines by Jody Hoffer Gittell of Brandeis University, this proved to be a critical insight. Southwest has more supervisors, with narrower spans of control, than American does—an organizational structure that allocates greater resources for problem-solving, a key source of Southwest's superior performance.

I've noticed that companies that pay lip service to becoming learning organizations often turn out to be places where few workers have much opportunity to learn. Organizational learning requires three things: a clear understanding of recurring problems, the willingness to allocate resources to address the root causes of those problems, and cultural values that foster learning—which means encouraging workers to find, fix, and report mistakes rather than heroically patching over recurring failures. None of this is sexy or glamorous. But if you really want to outsmart your competition, it's the intelligent way to go.