WOOL in conversation with Prof. Vijay Govindarajan, Coxe Distinguished Professor at Dartmouth's Tuck School of Business and a Marvin Bower Fellow at Harvard Business School, on what lies ahead for businesses of tomorrow, what kind of organizational DNA we must have in order to anticipate and respond to changes on a continual basis and how we can execute breakthrough innovation strategies.
WOOL:How is innovation today different from innovation in the past?
VG:We now live in an era of almost constant change. The key to success is adapting to those changes and the strategy is innovation. First, new technologies continue to emerge at an ever-more rapid pace. Second, globalization brings with it new markets, new customers, non-traditional competitors and new challenges. Third, the Internet has created much greater transparency to any company's strategy, actions and performance. As a result of these forces, companies find that their strategies need constant redefinition either because the old assumptions are no longer valid, because the previous strategy has been imitated and neutralized by competitors, or because technological developments and globalization offer unanticipated opportunities. In such a scenario, innovation is critical. For instance, Amazon is one such singular enterprise whose innovation strategy has permitted it to experiment in different spaces consistently: A website that once sold only books to a major e-tailer that sells about anything to AWS- a $13b business to physical stores. Amazon Go, which allows a shopper to skip both the line and any cash register in a convenience store, is a great example of Amazon building a technology platform that could be sold to other businesses as well.
WOOL:Not all innovation is successful. What turns breakthrough ideas in to breakthrough growth?
VG: Leaders already know that breakthrough innovation calls for a different set of activities, skills, methods, metrics, mind-sets and leadership approaches. And it is well understood that creating a new business and optimizing an already existing one are two fundamentally different management challenges. The real problem for leaders is doing both, simultaneously. How do you meet the performance requirements of the existing business, one that is still thriving, while dramatically reinventing it? How do you envision a change in your current business model before a crisis forces you to abandon it? The way to do this is to allocate the organization's energy, time and resources, in balanced measure, across the following three boxes.
Box 1: The Present - Manage the core business at peak profitability;
Box 2: The Past – Abandon ideas, practices and attitudes that could inhibit innovation; and
Box 3: The Future – Convert breakthrough ideas into new products and businesses. The three-box framework makes leading innovation easier because it gives leaders a simple vocabulary and set of tools for managing and measuring these different sets of behaviors and activities across all levels of the organization. The New England Patriots provide an excellent example. The internal machinery of the National Football League is designed to guard against the possibility of teams like the New England Patriots. The Patriots thrive by exquisitely understanding where and how to seize advantages and by adapting to circumstances that change from week to week - opponents, weather, injuries, etc. The Patriots are good at focusing on what they can control, and not on what they can't. The team's mantra is 'do your job'. If each player remains intensely focused on doing his job as well as possible, the team will flourish. This is a common Box 1 principle. Forgetting the past (Box 2) often requires a seemingly hard-hearted lack of sentimentality.
WOOL:What is the toolkit for building businesses of tomorrow without endangering the business of today?
VG:Compared with companies that own factories, products and supply chains, digital companies are far more vulnerable to quick imitation. For instance, not so long ago, everyone was using Evernote, the organization app. Now Microsoft OneNote, Apple's Notes, Google Keep, Simplenote and other apps offer similar functionality. Skype, FaceTime, Viber, Jitsi and Google Hangouts all battle it out in the video chat area. Then there's Dropbox, the pioneering, user-friendly cloud storage company, whose basic functionality was quickly mimicked by Microsoft, Apple, Amazon and Google. Creative destruction has always been a force to be reckoned with, but in the physical world, the cycles were longer. In the technology-based sectors, the cycles have accelerated.
Therefore, the toolkit to successfully create the future (Boxes 2 & 3) even while managing excellence in the present (Box 1) are: How do we identify the market discontinuities (for example, fundamental shifts in technology, customers, competitors, lifestyle/ demographics, globalization, regulations, etc.) that could transform our industry? How do we analyze the opportunities and risks, as a result of our understanding of market discontinuities? How can we create new growth platforms (Box 3) with a view to exploit the market discontinuities? How do we selectively forget the past (Box 2)? What are our core competencies and how can we leverage them in the growth platforms? How do we allocate resources to support growth? What kind of organizational DNA must we have in order to anticipate and respond to changes on a continual basis? How do we execute breakthrough innovation strategies?
WOOL: Do you think performance pressure stimulates the creative process or does it lead to drudgery?
VG:Aspiration, rather than desperation, is a better way to inspire people to be creative. Leaders should create ambitious goals like JFK's vision to put a man on the moon. Leaders should create a sense of urgency to change without an actual crisis.
WOOL:How do you separate the winners and losers in innovation? Draw examples from businesses and brands you admire.
VG: Winners create bottom-line results. For instance, Blockbuster, which began as a rentals-by-mail and streaming service, lost the fight to Netflix in a battle between old technology and new. Blockbuster boasted of over 8,000 stores and $3 billion in annual revenue, and yet failed to innovate. The key is to realize that innovation is necessary to remain strong. If a company needs to remain strong all the time, then it needs to innovate all the time. The world is changing and to adapt as per the changing needs, you will need to change too. Unless the company adapts, it will die. Look at Amazon, it continues to be a winner with an inherent startup mindset that is always striving to recreate our expectations as well as itself. The way it has entwined its technological sophistication with its digital platforms has changed the whole customer experience as well as reshaping of businesses. From Kindle, Echo, Fire TV, Fire Tablets and Dash buttons, Amazon is expanding to highly-curated Amazon bookstores. On the other hand, Barnes & Noble's Nook tablet, which was once seen as a viable competitor to Amazon's Kindle, is now obsolete. While Amazon promoted its tablets as devices for reading books, streaming television shows and movies, and reading the news, Barnes & Noble only played up the book aspect of the business.
WOOL: As leaders, how do we bridge the gap between the burst of inspiration and creating real business impact?
VG:Creating impact with innovation requires leaders to remember that they have a responsibility to take action in three time horizons at once: Executing the present core business at peak efficiency (Box 1); taking steps to avoid the inhibiting traps of past success (Box 2); and innovating a future built on non-linear ideas (Box 3). To create impact, leaders must remind the organization about the distinctive skills each box requires, how the boxes interrelate and what it takes to balance them.
WOOL: What goes into creating a perfect balance between the three boxes? Tell us how Hasbro managed to do so?
VG: In business, it's important to balance all three boxes. In fact, it is the central challenge for companies that need to innovate and grow while keeping their core business healthy. I strongly believe that leaders need to operate in all three boxes simultaneously. That's easier said than done, for the CEO must not only balance resources across the three boxes but also know what to destroy and what to create. Hasbro used one of its classic products to spread the message about the threebox approach.
In 2000, Hasbro was looking at reinventing itself. It wanted to create a core strategy around the value of its brands, but many of them were lying fallow. It also had little presence in emerging markets. So, it relaunched brands, and some success came its way, but it was important that the rest of the organization understood the strategy. The initial step was to move away from manufacturing categories such as toys, games, etc., towards a brand orientation with global brand leadership. To move under Box 2, it decided to forget how it operated in the past and created regional centers of excellence for sales and marketing. It progressed from being market-orientated to being consumer-focused. It then changed all its processes. For Box 3, it added a third year which gave it a stronger view into the future.
Since then Hasbro has invested aggressively and now earns more than 50 percent of its revenues from non U.S. markets, including significant revenues in emerging markets. The company has increased its emphasis on digital gaming too. Hasbro's Global Brand Teams have leveraged core brands, such as Transformers, across multiple platforms: Toys, movies, television and the Internet (including social media). In 2000, Hasbro's top eight brands delivered 17 percent of total revenues; and as of 2017, they accounted for more than 50 percent.
Between the end of 2000 and the first quarter of 2017, Hasbro's stock prices rose from $11 to $72. This represented a compounded annual growth of 14 percent in the market cap in 17 years, despite the turbulence of the dot.com bust and the Great Recession. In sharp contrast, the stock price of Mattel, Hasbro's major competitor, increased from $15 to $25 during the same period. Even though Mattel exceeded Hasbro in sales revenue $6.02 billion vs. $4.3 billion both companies had a similar market capitalization as of 2017.
WOOL: What if a company manages to balance the first two boxes, but fails to get into the third? Share some examples.
VG: Blockbuster was stuck in Box 1 and went out of business because it did not pay attention to Box 3. Barnes & Noble and Nokia met the same fate.
WOOL: You had said that “business organizations are not designed for innovation but are designed for ongoing operations. And there are deep and fundamental conflicts between the two.” What are those conflicts and how do we manage them?
VG: The fundamental conflicts between The Present (Box 1) and The Future (Box 2/3) are as follows:
Urgent vs Important
Short-term vs Long-term
Efficiency vs Flexibility
Routine vs Non-routine
Predictable vs Unknown
Today vs Tomorrow
The design for the Future should, therefore, be kept deliberately independent of the Present. That means co-existence of different cultures and leadership styles as well as performance management systems and incentives which are suited to that box.
WOOL: Is the idea of a core competency outdated? If not, can innovation help companies address completely different markets?
VG: Companies should not just leverage current core competencies. Part of the competition for the future is about building new core competencies. Take, for instance, the automobile industry. The historical core competency of auto companies is mechanical engineering skills - this helps them design engines, shafts and pistons. To create driverless cars and autonomous vehicles, auto companies must build new competencies in computer science and artificial intelligence.
Vijay Govindarajan, known as VG, is widely regarded as one of the world's leading experts on strategy and innovation. An NYT and WSJ best selling author, VG was the first Professor in Residence and Chief Innovation Consultant at General Electric. In the latest Thinkers 50 Rankings, Govindarajan was ranked the top Indian Management Thinker.