The corporation once had a "perfect world" scenario: create an extraordinary product in a blue ocean (i.e., new) category and defend a fountain of profit with good strategy and smart tactics.
In the perfect world, change came in increments. Some competitors would enter the category with some variation on the theme. Others would look for "nook and cranny" weaknesses. The corporation would secure it’s position with incremental responses…and profit poured forth.
The world changed. Now, the corporation is subject to blind side hits. Now the problem is not incremental challenges, but fundamental shifts. For Time Warner, this was the rise of an advertising based revenue model. For The Coca-Cola Company, it was the rise of the non-corbonated soft drink. For Microsoft, it was the rise first of the internet and then server-based software. For Detroit, it was Japan. (The irony: while American corporations are being encouraged to set out in search of "blue oceans," the real challenge are the great masses of water that come looking for them.)
These changes require fundamental shifts in corporate assumption and practice. And this is hard. Corporations rise to greatness because they are good at, say, CSDs (carbonated soft drinks). The advent of Snapple and Gatorade forces them to take on the new, but often this feels like a betrayal of the very things that make the corporation exceptional. "Sure," goes the complaint, "we can make fruit juice, but what we exist to make CSDs!"
It is, finally, a cultural problem. CSD assumptions supply not just the "what" and the "why" of the corporation, but it’s deepest, most powerful, and least visible assumptions, the "unknown knowns," we might call them (with apologies to Donald Rumsfeld).
The problem at corporations like Time Warner, the Coca-Cola Company, Microsoft and "Detroit," is not intellectual laziness, a failure of the imagination, or, God knows, a failure of will. The problem is that non-incremental change forces the corporation off its game, out of its competence, and away from its deepest understandings of the world. Adaptation is possible, but a voice of warning sounds in the head of the senior manager: that way lies the destruction of the extraordinary intellectual, strategic, and cultural capitals that make us who we are. That way lies chaos.
There are lots of ways to rethink the corporation so that it can address the problem of non-incremental change. There is the challenge taken up by Brown and Eisenhardt, Foster and Kaplan, Hammer and Chompy, Handy, Peters, Prahalad, to name a few. The corporation is learning new tricks. The new corporation is being invented fitfully, gradually, and painfully. But it’s coming.
Innovator’s innovation 1
What I would like to see, for deeply self interested reasons, is the creation of an observation platform from which we can keep an eye out for the next new things. In keeping with our Tsunami references, let’s call it a wheelhouse, a conning tower, or a ship’s bridge.
The trick would be to find 5 or 6 really smart, well educated, well informed, well connected, deeply curious, utterly practical people. These qualifications create a tiny Venn intersection, but, hey, we only need 5 or 6 people.
Innovator’s innovation 2
Once potential changes are identified, it is time to see what difference their difference will make. How will the corporation as it is presently constituted in these particular waters? This will help us to find, extract and replace the "unknown knowns" in the corporate culture.
Innovator’s innovation 3
Ok, now we need to build a series of simulated corporations, fit them out, run them in a tub somewhere, and refit as necessary. (Will someone please scuttle the naval metaphor, please!) We can’t wait till the future is here to start the work of adaptation. We want to have done the conceptual work for eventualities well before they eventuate.
Ok, out of time.
References
Brown, Shona L. and Kathleen M. Eisenhardt. 1998. Competing on the Edge: Strategy as Structured Chaos. Boston: Harvard Business School Press.
Foster, Richard and Sarah Kaplan. 2001. Creative Destruction. New York: Currency.
Hammer, Michael, and James Champy. 1993. Reengineering the Corporation. New York: HarperBusiness.
Handy, Charles. 1990. The Age of Unreason. Boston: Harvard Business School Press.
Kim, Chan and Renee Mauborgne. 2005. Blue Ocean Strategy. Boston: Harvard Business School Press.
Peters, Tom. 1987. Thriving on Chaos: Handbook for Management Revolution. New York: Knopf.
Prahalad, C.K. and Venkat Ramaswamy. 2004. The Future of Competition. Boston: Harvard Business School Press.
Hi Grant, a couple of thoughts:
Certainly the age of the “endless” blue ocean is long gone. (And here’s my quick summary of the Blue Ocean book: Look at what other people are doing, and do something different.) Disruptions are coming more quickly. I do think that corporations are not quite as blind to disruptions as you seem to be painting here; I go back to Christensen’s discussion of the implosion of the minicomputer market in the 1980’s. They saw the PC coming, they knew how to make PC’s (the technology was much simpler than the products they already made), but they didn’t know how to sell them in their existing business model and still make a profit. It’s not always about disruptive products (like Snapple to CSD’s), but also disruptive businesses. If one minicomputer company had failed you could put it down to misjudgment and missed opportunities, but to have them all fail simultaneously? There’s something else going on.
Having said that, a blindness caused by a mix of arrogance and certainty based on past performance can be just as damaging. I’m thinking here of Blackberry, which seems to be changing its tune of late, but every official statement by an exec of that firm for a period of 2-3 years came across as “we’re invincible, we’ve got the secret and no-one else can figure it out.” Red flags should go up all over if you start sounding like this for any length of time. Steve Jobs is starting to sound that way dismissing the idea that the iPod could drop in popularity.
While I agree that having a handful of smart people that are the internal, um, birds nest occupants, is a good idea, can you talk a bit more about how they might interface with the “everybody is a marketer/trendspotter” that you talk about toward the end of Flock and Flow? (Sorry for the gross oversimplification)
Grant
We know from looking at the geological record that natural change occurs in fits and starts with long periods of incrementalism in-between. The same occurs in the world of business too.
All established companies face the problem of upstart companies providing better, cheaper, faster outcomes to their real-world problems than they do. And it is often upstart companies. Those not weighed-down with the accumulated baggage of how the industry works, or how things are done around here.
But I am not convinced that “5 or 6 really smart, well educated, well informed, …” are what companies need. Just like they aren’t what the Soviet Union needed to set prices in the 1970s. Companies need to be talking to many more people out there than just a handful of “so-called experts”.
And I am completely convinced that simulations will not work either. The whole history of economic simulation (with those same handful of experts!) shows that some things are just too complex to simulate, particularly for the purpose of forecasting. Companies need to be experimenting to see approximately what works, not simulating to understand precisely why things wouldn’t.
Back to the drawing board I fear.
Graham Hill
hi grant.
elegant way of rearranging the blue ocean picture. fully agree. it is a wide wide see out there (not everywhere a harbour for passengers, freight and sweet water).
also very much agree with your three step innovators innovation model. seen it in action several times and for a number of years already. every company that has a innovation lab works more or less exactly this way. i am sure the pharmaceutical industry works this way too.
still it does not prevent them from failing.
by nature every true innovation is a trip into unknown markets.
what you need is a good portfolio strategy… but you also need what the french call “fortune” – a daredevil attitude that challenges the stars to stand by you. commitment – decisiveness – leadership.
in order to succeed you need ships and crews that are build for success. you need the conquerors.
if they are not as successful as you hoped they would you will find it extremely difficult to unfocus these teams again and change course. speaking from experience i think it is virtually impossible. you will have to start by bringing in a whole new team . but the best thing will probably be to sink the whole venture – given you have this rich portfolio of other businesses that i adviced you to have.
not being too familiar with the apple case – and speaking purely hypothetical – …the day jobs was kicked out of his company probably marks the turning point towards something that later became the ipod success.
on the same note i can share the sentiments of adam richardson here.
As Christensen said, the innovator’s dilemma is in his head. Well, first it’s in his eyes: not seeing what you don’t believe is possible is the first problem; not believing what you’re seeing is the second; not being able to imagine it as a threat is the third; not responding to it in time is the fourth.
How many big misses does Microsoft have to have before it gets it? As many as it takes to get Gates, Ballmer, et al. out the door. The problem’s at the top. Sensing mechanisms are important but valuing the data being sensed is definitive.
I’m starting to wonder if it’s possible for Boomer leaders to succeed in the heart of today’s environment (those places where the dynamic churn is greatest). And, as a card-carrying member of that generation, I’ll tell you it stings to consider such heresy. Here’s something Chris Anderson of Wired Magazine said at Pop!Tech that got me to sit up straight: “I do whatever my intern tells me. If s/he tells me to run a story about X, I do, even if I don’t get it.” Sounds like a rare Boomer to me: one who believes he has something to learn from some Gen Y kid!
You’re Company X, a leader in your industry, and a substitute product/business model threatens to make what you do obsolete (or at least to kill your growth rate). Should you a) try to reconfigure what you do now to minimize the damage, b) try the “join ’em” strategy by copying the new product/business model, or c) try to strike out in a new direction that is different from what you do now but also not subject to the threat?
Obviously, “it depends” is the only intelligent answer here, but the correct framework for thinking about it is pretty clear. The economic contribution of the firm as an organization lies in its ability to get more value out of a combination of assets and people than they are worth separately (or if scattered and assimilated to other combinations). Absent this contribution, the best thing is to break up the band and let its parts and people migrate off to higher-value uses.
If a shift in demand or an innovative product destroys only some of that economic contribution, adaptation–changing how the organization deploys its people and assets and slightly changing the mix of same–may be a good idea if it doesn’t take the firm into areas where its unique practices and combinations are poor at creating economic contribution. In other words, if the skills and processes that make Coke great at soda are not effective in selling fruit juice but still have residual value in carbonated beverages, the right move may well be to keep the organization focused on soda. Or if soda is becoming obsolete quickly, one could look (more speculatively) for entirely new markets to which Coke’s capabilities could be applied.
The idea that Coke should be very aggressive in attacking the fruit juice category stems from an intuition that in fact the level of change or adaptation required isn’t too high. In other words, the argument for Coke “adapting” to fruit juice growth by going into it is that Coke’s existing assets, people, and practices are fairly well-suited to the new markets and require only minor modifications or additions. If there were no carryover of its existing capabilities to the new business, there’s no reason for Coke rather than some outside firm to be the one to engage that market.
The idea that Company X should adapt to a threat by changing its people, its culture, its assets, its practices, and its product line raises the question of what sense we are really talking about adaptation at all. In that case, we would really have Company X’, which has the same legal shell but is completely different from Company X in all substantive ways. The swap from X to X’ is unlikely to be a good deal for owners, because the residual value of what X was doing uniquely well is lost while the new X’ could have just as easily been formed from scratch out of resources available elsewhere.
I don’t know how well known this is, but Coke did get into the juice category by buying Odwalla several years ago. This was a smart move on their part: they got the brand and goodwill of Odwalla, and was able to pump it up with their distribution clout. They have kept Odwalla outwardly virtually unchanged (though the “natural” move into organics that you would think Odwalla would do has been supposedly quashed by Coke). This is actually a really good example of an established company reacting to a disruptive entry – they didn’t try to launch their own juice brand from the ground up but acquired the market leader after they had established the customer base and lets it work semi-independently in the way that it needs to. It’s in other areas of non-carbonated drinks that Coke has had a harder time, though manages this very successfully in Japan.
It must be really hard to be a corporate leader today. There is a dearth of inspiring elders, of mentors, and of time to just think about stuff (a la IBM’s cloud room on the top floor). But the basics still apply: Entrepeneurs need passion for a personal IDEA at the start of business. Leaders must know where they have expertise, and don’t pretend otherwise. Risk-takers listen to their gut for intuition regarding how their IDEA has connection with the human experience. And there is no substitute for a large sense of self for the leader.
Marketing and leadership are so intertwined and every admirable leader’s story is unique. To translate this back into your water metaphor, if I am a sailor I will not cast off with my captain unless he has the necessary leadership capacity. If I am a foreigner meeting your ship at the dock, I have to be able to recognize your wares as fit for human consumption. And if I am a passenger who goes over the side, I can only tread water for so long unless you have had lifeboat drill and given me my own life jacket. Like I said, business ventures takes immense courage. I am glad they have people like you who know how to help by trying to ascertain what is true.
Steve writes: “Obviously, “it depends” is the only intelligent answer here, but the correct framework for thinking about it is pretty clear.”
My business experience with problems like the one described in Grant’s post is that there is never one, single “correct framework for thinking about it”. If there was, either the solution to the problem, or a methodology for arriving at a solution, would be obvious. In all the cases of which I have direct experience, neither of these was obvious, and reasonable people, all intelligent and long-experienced, disagreed about what to do.
When faced with the disruptive prospect of the PC, IBM tried 3 times to develop a PC operating system before arriving at a “solution” — first, using their existing software development division (too slow & cumbersome); second, using a skunks-works type independent software unit (not cohesive); and third, outsourcing the task to a little company called Microsoft. Only the third of these methods worked, in the sense of delivering an integrated, working PC O/S within a reasonable timeframe. On the other hand, outsourcing the O/S did great damage to the profits which IBM could subsequently extract from the growth of the PC market.
I am not sure that any perfect solution existed to this problem for IBM, either then or now (ie, with hindsight). I am very sure that there was no single “correct way” to think about the problem.
Peter: A framework isn’t an algorithm that spits out a solution. It’s just a way of keeping track of the pros and cons of different options. Where you come down in any given situation depends on a lot of specifics and a lot of things that are inherently uncertain and hard to measure. And possession of a framework for thinking about something in no way implies that you can find a “perfect” or even satisfactory solution. Doctors have a framework for thinking about cancerous tumors, after all.
My point was that it is incorrect to suppose that companies should always change their basic thinking and processes in order to react to radical new threats. If adaptation requires throwing away the residual value of their existing combination of people, processes, and assets, it may not be worth it. Specific situations require difficult case-by-case analysis and judgment, which is why we have managers instead of robots. But I stand by the claim that this tradeoff is central. It’s not a very strong claim, because the tradeoff is fairly general and weak.
With respect to the IBM PC, the company may well have done the best it could. (Some would question the later decision to pull the independent PC division back within the bureaucracy, and many would question the later decision of 1986-7 to introduce the Microchannel Architecture which violated IBM’s tradition of backward compatibility.) That doesn’t contradict the point that IBM had to decide which of its assets were applicable to the new market and which ones weren’t, and whether there was enough commonality between the PC business and its existing businesses for its assets and people to make a positive economic contribution there. I suspect, for instance, that if IBM had (incorrectly) concluded for some reason that its brand name would not transfer over to PCs, it would have pulled the plug on the whole venture.
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Good points, Grant.
Remember a few months ago when Leavitt died and you celebrated his most famous notion and I dissented? Aren’t you now coming around to my way of thinking, that corporations reinventing themselves or seeing threats before the enemy soldiers storm ashore, is so damned difficult it’s probably impossible?
Auto, But I don’t think it’s impossible. I just think the corporation should be hiring the likes of us (and I mean the people who have contributed to this thread: Adam, Graham, Jens, Tom, Steve, Carol, Peter, me and you, what a dandy consulting firm that would be) if they wish to protect themselves from the high waters of a turbulent marketplace. Thanks, Grant