A few weeks ago I posted an entry inspired by an excellent article in The World in 2011, The Economist’s annual issue offering predictions for the following year and beyond. Another article in the same issue caught my attention, Multinationimbles, by Matthew Bishop, who is the US Business editor of The Economist.
The article is built around a somewhat provocative premise: “The business winners will be those that combine scale with agility.” It is provocative because people generally associate agility with entrepreneurial startups, and scale with more mature, established companies, although a few relatively young companies like Amazon, Google and Facebook have already achieved scale to complement their entrepreneurial agility.
But the potential oxymoron in the article’s premise is the notion that a large mature company can achieve this combination of scale and agility. Doesn’t this violate Schumpeter’s 70-year-old theory of creative destruction? Once large and successful, aren’t companies that once revolutionized their industries supposed to be too slow and locked into the sources of their past success to respond to the new waves of entrepreneurs now attacking them with innovative products and services?
Bishop’s article focuses primarily on the few mature companies that have achieved this important scale-agility combination: GE, Procter & Gamble, Wal-Mart, and especially IBM.
“In June 2011, with much fanfare, IBM will celebrate its 100th birthday. Big Blue is a rare example of corporate survival: few companies last that long, and at times it didn’t look as if IBM would either. Its secret is not resilience alone, but an ability to reinvent itself. As Lou Gerstner recounted in his bestseller, “Who Says Elephants Can’t Dance?”, he brought the firm back from the brink after he became its chief executive in 1993 by shifting its focus from selling hardware to selling services. Since Mr Gerstner left, IBM has reinvented itself again - this time in how it is run as much as in what it sells - with the result that it will mark its centenary as a role model for what a company needs to be to prosper in the second decade of the 21st century.”
Bishop predicts that in 2011, “the biggest winners will be companies that can combine the advantages of scale with the agility to respond to fast-changing market conditions.”
“But the ability to operate at scale will also be vital in emerging markets.... Scale is also important in winning government contracts in fast-growing areas such as infrastructure, health care and education. Governments like to know that their contractors are serious operations, unlikely to vanish overnight.... Financial scale and flexibility will also give companies a greater edge than usual, whether in greenfield investments or in acquisitions. During the financial crisis the gap in financial strength between the best firms and the rest has grown. This will enable some great deals to be done by the strong.”
I have little personal experience with startups or even the kind of relatively young companies mentioned in the article. But, I have lots of experience with large, global companies, given my forty-year association with IBM, my more recent involvement with Citi, as well as the many other large companies I have worked closely with through my career. It is not surprising that I am particularly interested in entrepreneurship and innovation, let alone reinvention and survival in such large, global companies.
Schumpeter was right. It appears as if there is a kind of natural life cycle to a business. Companies are born. Most don’t make it, but a few do, because their new disruptive innovation takes hold in the marketplace. The new successful companies attract a lot of customers and investors which enables them to grow fast. But, after a certain number of years - a few decades, give or take - the company, now powerful and big, begins to slow down, and is unable to defend itself against the next generation of entrepreneurial innovators. It is as if the market’s invisible hand deems the company to be more valuable as a kind of carcass for the next generation of fast growing new startups to feed on, rather than as an ongoing, viable institution.
I come to this somewhat fatalistic view of business having lived through the near-death experience that IBM went through in the early 1990s. This was a very painful time for me personally and for all of us in the company. In my long career in the IT industry, I have also seen how many once mighty companies either disappeared altogether, like Digital and Compaq, or became shadows of their former selves, like Cray and Fujitsu. The IT industry may be a particularly tough battleground for companies because it is so fast-changing and competitive, but similar dynamics are at work in many other industries, albeit with different life cycle parameters.
What advice would I give large global companies to help them survive major disruptive changes in spite of the odds? How can a company leverage the disruptive changes to reinvent itself and achieve the scale-agility combination that Bishop deems critical to be a marketplace winner in our times? Let me discuss a few answers to these questions.
First of all, you need to identify and acknowledge the disruptive change as early as possible, in order to analyze its potential consequences and come up with a plan of action. Disruptive innovations, most of which are technology-based by nature, take years to develop, come to market, and build up enough momentum to threaten existing products and services. Like watching out for asteroids, most such innovations can be identified and carefully tracked years before the broad marketplace notices that something new has now appeared on the horizon.
Is the disruptive change going to happen with or without you, regardless of whether you like it or not? Once you become convinced that the change is indeed inevitable, you need to make some tough strategic decisions. What are the implications for your business, and what should you do about it? Will the change disrupt existing businesses, both your own and those of competitors? How can you best integrate the coming changes, disruptive as they are, into your existing strategies? How quickly should you move? The answers to these questions and the ensuing actions you take are critical to the future of the business.
This is easy to say, but devilishly difficult and risky to pull of for most companies. Even when the disruptive change and its equally disruptive business model are clearly visible, and even when a viable survival strategy has been identified, the new strategy can be nearly impossible to implement. Existing organizational and physical assets may no longer be relevant, and actually get in the way. Often, the only prescription is massive downsizing, something that senior executives may find very difficult, especially if they have been with the company for a long time.
The same culture that once made an institution great often becomes the key impediment to its ability to adapt to the new market realities. A successful company - especially one whose senior managers rose up the ranks by building it into a great institution over the years - can become rigid, almost paralyzed when facing an environment radically different from the one in which they grew up and had so much success. Like actors in a kind of Greek tragedy, they see the changes coming and understand what needs to be done, but are somehow unable to act. Disruptive innovations are disruptive because they have truly changed the game. Much of what the previous winners did may no longer work.
Understand your Limitations
Arrogance and hubris are almost as dangerous as being in denial or unable to act. Hubris is a particularly appropriate term, first used in ancient Greece to describe the overconfident pride and arrogance that gets the powerful and rich in trouble.
Human nature has not changed all that much in the intervening centuries. It is difficult to find people whose accomplishments have helped them achieve positions of power, success and wealth, who do not exhibit feelings of arrogance and pride to some degree. Such feelings often cause the management of large companies to dismiss the innovative offerings of startups and other competitors in their early stages as being too small to be worth bothering with. Given their market and financial power, they assume that they can always mount a counter-effort should they later need to, bring out their own offerings to compete directly against the new entrants and wipe them off the map.
This often does not work. Large companies and startups are inherently different. Large global companies have generally achieved their industry leadership and scale through operational excellence. Operational excellence entails improving the existing products and services of the company with a string of incremental innovations that will add new features, lower cost and improve quality. It means nurturing employees, business partners and customers, so they will all be happy to be associated with the company. And it requires a strong focus on meeting the quarterly revenue, profit and cash expectations of their investors and the financial community.
Operational excellence requires detailed analysis of technologies, quality, processes, competitors, customer satisfaction and market segments, and as such, is well suited to a more hierarchic style of management. But managing an emergent business, especially one based on new, disruptive innovations, requires a very different management style. It cannot be based on rigorous information analysis, because in its early stages, there is little information to analyze. There are lots of unknowns because, early on, it is not clear how the market for a new product or service will develop. Consequently, many large companies have trouble nurturing new disruptive innovations even though, or perhaps especially because, they have achieved exceptional operational strengths.
A startup is able to focus all its energies on developing and bringing to market the new ideas around which the company was originally founded. This enables the startup and its small management team to quickly get its offering to market, keep improving it based on customer feedback, make alliances and partnerships as appropriate, and generally, be very agile in making decisions and responding to market needs.
In general, a large, established company cannot quite have the same degree of focus on disruptive new ideas, because it must also deal with continuing to improve its existing products and services, as well as continuing to support its existing clients.. In his seminal book, The Innovator’s Dilemma, Clay Christensen succinctly wrote about the challenges that successful companies face:
“They pour resources into their core business. They listen to their best customers. And in doing so, industry leaders get blindsided by disruptive innovation - new products, services, or business models that initially target small, seemingly unprofitable customer segments, but eventually evolve to take over the marketplace. This is the innovator’s dilemma - and no company or industry is immune.”
Leverage your Strengths
But while it is very difficult for an established company to act like and compete directly with a startup, it has many strengths that if properly leveraged can give it formidable advantages.
The key, in my experience, is for the large company to leverage its organizational, digital and physical assets, and successfully integrate the disruptive innovations with these core assets.
Their leaders must carefully examine the answers to a few basic questions: What are the organization’s capabilities or core competencies needed to deal with this emerging technology? How well does the new technology fit with existing legacy products, services and installed base? How well do the new technology and related products and services fit with the overall organization? Does the company have brand permission to go into this space naturally, or will it take a major marketing campaign to try to reposition the brand?
If the business is able to successfully integrate the disruptive innovations with its core assets, the now rejuvenated and transformed assets will provide the company an advantage over both established competitors and startups. Its financial strengths enable it to hire the necessary talent to develop and bring to market the new offerings. Or, given the time-to-market pressures in our increasingly competitive environment, the company may decide to embrace the new disruptive innovation by acquiring a startup that already has a product in the marketplace, rather than waiting for the time it takes to start a new group and develop the product in-house.
The assets that have made a company successful over the years - from their products and services to a reputable brand and loyal customer base - are invaluable. Instead of circling the wagons against new ideas, it must make sure that the company itself, along with its key assets is able to embrace the new ideas and evolve into the future. That takes attention to innovation and agility at all levels - from the technologies that go into developing new products and delivering new services, to culture, leadership and organization. The companies that are able to find the right balance between operations and innovations, that is, between the present and the future, are the companies that have the best chance to be around for many years to come.
“Does that mean,” Matthew Bishop asks in his last paragraph, “the end of the Schumpeterian ‘creative destruction’ by start-up companies that has driven so much innovation in recent years? Joseph Schumpeter, an Austrian economist, argued that disruptive upstarts were needed when incumbent firms failed to drive innovation. In 2011 some of the most venerable incumbents will show the world that they have figured out how to do the creative destruction themselves.”