Alfred Sloan is known as the father of the modern corporation, having transformed General Motors into the industry titan of his era by introducing principles such as specialized management roles, decentralized organization, and cost accounting. Sloan's ideas on dividing tasks into manageable chunks led him to break GM into divisions (Cadillac, Buick, Chevy, Pontiac) each focused on a different customer segment. Sloan's management principles--along with those of contemporaries like Taylor as well as Henry Ford, who pioneered mass production techniques--contributed much to the early development of management theory and practice.

Sloan's influence is evident today in the number of institutions that bear his name and the number of business schools that teach his ideas. But Sloan's success and influence on management overlook an interesting question: where did General Motors come from? Indeed, Sloan took the reigns of GM only after it was generating nearly $4 billion in inflation-adjusted revenues.

In fact, GM was founded by Billy Durant, a creative entrepreneur who made millions in the horse-and-buggy industry before starting GM. Durant was an experimenter who pioneered products in both industries and grew GM until the board of directors, recognizing that he was a talented entrepreneur but a poor manager, replaced him. Durant then cofounded Chevrolet, eventually repurchased control of GM, and ran the firm until the board removed him a second time and replaced him with Sloan. The fact that Sloan is so well-known and Durant so little known is intriguing. What were Durant's management theories? Why did they work in the early days but fail as GM became a large corporation?

The answer is simple: Management theory was developed to solve the large-company management problem and not the innovation problem. The former emerged during the Industrial Revolution, when the economy was transformed from mostly small to large businesses of unprecedented scale, producing things like oil, textiles, autos and railways. To make the trains run on time and increase the production of autos, these large corporations required a new profession: management. They needed managers to plan, coordinate, rationalize and optimize the operations of large, complex organizations. Business schools emerged to train this new cadre of managers to be effective at resolving the problems faced by large corporations, such as "What new features should we add?" or "How can we lower costs by five percent?" These are low-uncertainty problems calling for incremental changes to existing products or processes.

In contrast, most start-up or corporate entrepreneurs are trying to launch new products that have disruptive potential. They face high-uncertainty problems such as:

  • "Will consumers want to use a personal computer and can we make it easy enough for children to use?" (a demand and technology problem faced by Apple);
  • "Will people buy products over the internet , and can we provide fulfillment in a low-cost and reliable?" (a challenge faced by Amazon.com); and
  • "Will people make payments over the internet, and can our technology provide them the ease of use and security they need?" (a demand and technology problem faced by PayPal).

To solve these kinds of problems, innovators need a different set of tools. They can't use Sloan's tools and expect to succeed. Instead they need Durant's tools ... tools to manage the uncertainty of innovation and succeed.

Fortunately the theories to manage innovation are emerging rapidly around us. We see the bits in pieces in frameworks like lean startup, business model generation, design thinking, or agile software. In my view these are all pieces of the bigger puzzle, which I refer to as the difference as a business-school management approach (designed for low-uncertainty problems) versus an innovation-school management theory (necessary for high-uncertainty problems).

Here's the final irony in the story. Another big company with a two letter acronym, GE, has realized how much they are struggling to innovate, and have gone back to the kinds of tools their founders used to create the company in the first place. In particular, GE has started to apply the lean startup on a massive scale, in a program called FastWorks. They've trained tens of thousands of employees and reportedly saved hundreds of millions of dollars and a great deal of time in their innovation process. It will be interesting to watch.

I'll provide some insight into these tactics and the innovation school in future posts. But in the meantime, ask yourself, last time you faced a problem with an element of uncertainty, what set of tools did I apply?