The Secret of BMW's Success

By Gail Edmondson At 4:00 p.m. on a Friday afternoon, when most German workers have long departed for the weekend, the mini-caf?s sprinkled throughout BMW's sprawling R&D center in Munich are jammed with engineers, designers, and marketing managers deliberating so intently it's hard to hear above the din. Even the cappuccino machine is running on empty. It's an atmosphere far more Silicon Valley than Detroit.

"At lunch and breaks everyone is discussing ideas and projects all the time. It's somewhat manic. But it makes things move faster," says BMW chief designer Adrian van Hooydonk.

The intense employee buzz at BMW is hot management theory in action. Top consultants and academics say the kind of informal networks that flourish at BMW and the noise and borderline chaos they engender in big organizations are vital for innovation—especially in companies where knowledge sits in the brains of tens of thousands of workers and not in a computer server. Melding that brain power, they say, is essential to unleashing the best ideas.

HANDS ACROSS DIVISIONS. "Cross-functional teams look messy and inefficient, but they are more effective at problem solving," says James M. Manyika, a partner at McKinsey & Co. in San Francisco who has studied the effectiveness of such networks. Companies such as BMW that leverage workers' tacit knowledge through such networks "are widely ahead of their competitors," Manyika adds.

BMW is one of a handful of global companies including Nokia (NOK

) and Raytheon (RTN

) that have turned to networks to manage day-to-day operations, superseding classic hierarchies. Those pioneering companies still turn to management hierarchies to set strategic goals, but workers have the freedom to forge teams across divisions and achieve targets in the best way possible—even if that way is unconventional.

And they are encouraged to build ties across divisions to speed change. "Good companies have this lateral ability to communicate across divisions and silos, not just up and down the hierarchy. That's what makes BMW tick," says chief financial officer Stefan Krause.

LIGHTNING-FAST CHANGES. Speed and organizational agility is increasingly vital to the auto industry, since electronics now make up some 20% of a car's value—and that level is rising. BMW figures some 90% of the innovations in its new models are electronics-driven. That requires once-slow-moving automakers to adapt to the lightning pace of innovation and change driving the semiconductor and software industries. Gone is the era of the 10-year model cycle.

Now automakers must ram innovation into high gear to avoid being overtaken by the competition. That's especially true in the luxury-auto leagues, where market leaders must pulse new innovations constantly onto the market, from podcasting for cars to infrared night vision systems.

By shifting effective management of day-to-day operations to such human networks, which speed knowledge laterally through companies faster and better than old hierarchies can, BMW has become as entrepreneurial as a tech startup, consultants say. "Not many large companies take on lateral communications the way BMW does. It's a knocking down of barriers, like Jack Welch did at General Electric (GE

) to make a boundaryless corporation," says Jay Galbraith, a Breckenridge (Colo.)-based management consultant.

MOBILE-PHONE MESSAGES. BMW's ability to drive innovation even pervades its marketing division. "People talk about innovation in products, but what's underestimated is innovation in processes and organization," says Ernst Baumann, head of personnel at BMW, which has its share of radical new ideas.

To reach a younger crowd of potential buyers for its new 1 Series launch in 2004, BMW used mobile-phone messages as the main source of buzz, directing interested people to signups on BMW's Web site for pre-launch test drives in August that year—something unheard of in the industry at the time. The experimental tactic worked: BMW sparked responses from 150,000 potential customers—and sales of the 1 Series took off when it was launched in September, 2004.

In 2001, BMW stunned the advertising world by investing ad spending normally set aside for Super Bowl spots in short films that had nothing to do with telling consumers about its cars. The slick, professionally made films were pure entertainment, like its series of short films, The Hire, starring Clive Owens, and they cost a bundle: $25 million.

BALANCING ACT. The risky bet triggered serious consternation at BMW's Munich headquarters. "You have to worry when your marketing team goes into the business of making films," says Krause, who noted that Internet-driven businesses were imploding left and right in 2001. Given those conditions, "Who cares how many clicks you get."

Few large companies are willing to embrace the lack of organizational clarity and nebulous structures that drive innovative ideas. At most companies, headquarters would have put the kibosh on the short-film idea, which has since been widely imitated. Researchers say most experiment with networks on a small scale and very few use the practice to full effect since doing so means an uncomfortable balancing act between hierarchy and discipline on one hand, and free-wheeling networks that can veer toward near-chaos.

But for innovation-driven companies, networks that enable entrepreneurial risk-taking are a silver bullet. "The ideas are richer, they implement more effectively, and there is less resistance to change," says Rob Cross, assistant professor of management at the University of Virginia.

IDEAS FIRST. How does BMW manage discipline with creativity and keep the anarchy of networks from careening out of control? Workers at the Bavarian automaker are encouraged from their first day on the job to build a network or web of personal ties to speed problem-solving and innovation, be it in R&D, design, production, or marketing. Those ties run across divisions and up and down the chain of command.

When it comes to driving innovation, forget formal meetings, hierarchy, and stamps of approval. Each worker learns quickly that pushing fresh ideas is paramount. "It's easier to ask forgiveness for breaking the rules than to seek permission," says Richard Gaul, a 33-year veteran at BMW and former head of communications at the $60 billion automaker.

BMW's complex customized production system, the polar opposite of Toyota's (TM

) standardized lines, is easier to manage if workers feel empowered to drive change. Like Dell Computer (DELL

), BMW configures its cars to customers' orders, so each auto moving down the production line is different.

FORGET OLD-SCHOOL RIGIDITY. Making sure the system works without a hitch requires savvy workers who continually suggest how to optimize processes. "Networks can do things that hierarchies cannot, because hierarchies lack the freedom. With a network you get the powerful ability to leverage knowledge quickly to bear on solving problems," says Karen Stephenson, management consultant and Harvard professor. "A network is the only way to effectively manage BMW's kind of complexity."

By contrast, companies that don't have lateral nimbleness are crippled in fast-moving technology-driven industries. Rigid hierarchies that stifle fresh ideas and slow reaction times are one problem facing General Motors (GM

) and Ford Motor (F

).

Once giants like GM were king, dominating the market with their huge volume and purchasing muscle. Big is no longer the ticket to success, and the slow-moving bureaucracies that big companies are saddled with are now a major handicap. "Lean is passé. What is in is lean and agile: the ability to shift and adjust as circumstances in the market change," says David Cole, partner at the Center for Automotive Research in Ann Arbor, Mich.

KNOW THY CONSUMER. BMW managers, by contrast, even talk about the "physics of chaos" and how to constantly nurture innovation and creativity by operating on the very edge of chaos without getting out of control. "Discipline and creativity are not a paradox, there is a borderline case of self-controlling systems," says Gaul. "Where you break rules you have to be very disciplined." That's the industry's next kaizen—the art automakers will be forced to master in the 21st century.

The novel advertising scheme developed back in 2001 is a good example. Jim McDowell, then U.S. vice-president of marketing, was confident the project, dubbed "Big Idea," and kept under tight security in "War Room" No. 6 at BMW USA's Woodlake (N.J.) headquarters, would create just the kind of consumer buzz that BMW wanted—and would ultimately be more cost-effective for BMW than Super Bowl advertising. The idea was to give film directors a BMW car around which a compelling short film was to be made. Many of the tales centered on life-and-death chase scenes, but several were humorous or even melancholy.

McDowell figured if The Hire, took off and the films were downloaded from BMW's Web site by 1 million to 2 million viewers, BMW would chalk up the same number of eyeballs as a snappy advertising campaign aired during the Super Bowl, but would reach a higher percentage of BMW-type customers, progressives with a nose for cinema, technology, and high bandwidth. "If you really understand your consumer, you can be very clever about how to communicate. You can change the whole paradigm," says McDowell, who is now executive vice-president at Mini.

SNOWBALL EFFECT. McDowell didn't take any half-measures. He went after talented directors such as John Frankenheimer (The French Connection) and Ang Lee (Crouching Tiger, Hidden Dragon), and signed up stars such as Madonna, Clive Owens, and Gary Oldman—giving them complete artistic freedom, aside from the BMW model that starred in each film. No advance advertising heralded the Internet launch of the films.

The buzz started slowly with the first film but grew to avalanche proportions by the time Madonna's short comedy film about a cranky diva was released, overwhelming BMW's expectations and forcing the automaker to add servers as fast as it could.

But it didn't stop there. As the short-film gambit rocketed around the blogosphere, national TV broadcasters flooded McDowell's office with requests for interviews on CBS, Entertainment Tonight, and Fox News. The novelty of an automaker producing films fanned public interest and stoked downloads.

"EXPERIMENTAL ENVIRONMENT". After one year, the number of viewers who had visited BMW's Web site to download The Hire shot to over 21 million, and with three more films added in 2002, it rocketed to 100 million, sparking a Harvard Business School case study. One million enthusiasts ordered a DVD with all eight films.

McKinsey's Manyika, who has studied networks extensively, says knowledge forced through a company top-down drives "conformity, consistency, and efficiency." That's better suited to companies that make a standardized widget than a complex, electronics-driven product that requires constant innovation.

Companies such as BMW have to tap into tacit knowledge to spark fresh ideas. "It's more of a learning and experimental environment. It's building on what people know. It's learning instead of instruction," says Manyike.

HOW IDEAS TRAVEL. For academics and consultants studying the phenomenon of corporate networks, the most fascinating element is the "node" or the broker individual who can join two separate clusters with different pools of knowledge. Such a broker may have once worked in purchasing but now sits in R&D. As such, he or she can bridge the two worlds by "reaching across the white space of disconnected people," says Ronald S. Burt, a sociologist at the University of Chicago, who is studying the impact corporate networks have on performance.

That linkage speeds learning throughout companies—a vital tool to industries that should continually innovate. "People exposed to a diversity of information are at higher risk of seeing a new angle, a better way to frame ideas," says Burt. And companies that recognize and tap such social capital "have better growth rates and better patent rates. Formal structures decide who to blame. Informal structures decide how to get things done