Debunking Innovation Myths (#26)

Debunking Innovation Myths,
w/ Gary PISANO

We discuss with Gary Pisano, professor at Harvard Business School and author of “Creative Construction: The DNA of Sustained Innovation” — a book about how large companies can construct a strategy, system, and a culture of innovation that creates sustained growth. We discuss how organizations learn, innovate, and compete — and these are fundamental questions that Gary has been exploring throughout his career. Today, you will learn the four archetypes of innovation, Gary’s definition of a business model, who in the company should own a business model innovation and more.

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Gary recommends:

  1. One book: An Evolutionary Theory of Economic Change, by Richard Nelson and Sidney Winter
  2. One influencer: Jon Gertner
  3. Best article: “Strategic Planning — Forward in Reverse” by Robert Hayes in 1985
  4. Favourite brand: Ferragamo®
  5. Productivity hack: no traveling!!

Full podcast transcript:


Creative construction is, really, the art, if you will, of balancing the need to maintain the existing business, but then explore and create completely new innovation opportunities. It’s different than a startup because a startup gets to start from scratch, but larger, more established enterprises can’t.— Gary PISANO

[00:01:23.25] Ben: So, Gary, thank you so much for coming on the podcast! As I was saying to you before, I absolutely loved the book! I think what’s kind of special about it is it’s obviously very instructive about how to do innovation in the face of uncertainty, and imperfect information, and everything else. But it also challenges and debunks a lot of our received wisdom about innovation, including the central idea of constructive or creative construction. How do you define creative construction?

Gary: For a company, it’s like rebuilding the house as you’re living in it. So, for established companies, the knock on established companies is that they are so consumed with their existing businesses, they can’t do true innovation. So, this book tries to debunk that myth and provide some ways in which bigger companies can do that. But they face challenges, obviously, because they have existing capabilities, existing businesses. So, creative construction is, really, the art, if you will, of balancing the need to maintain the existing business, but then explore and create completely new innovation opportunities. It’s different than a startup because a startup gets to start from scratch, but larger, more established enterprises can’t. So I guess that’s how I would define creative construction: is that act or that art of searching for transformative innovation opportunities, all the while maintaining your existing business.

[00:02:56.12] Ben: Even though it’s harder for large companies to innovate and they have this treadmill effect of a bar that’s being constantly raised, they nonetheless do have many advantages when it comes to innovation, right? So, as you say in the book, they’ve got resources that startups can only dream of, and they can actually have a portfolio of different innovation projects they can work on at once. What other advantages would you say that large companies have when it comes to innovation?

I always say that strategy is where you spend your money and an innovation strategy specifies very clearly, “Here are the top priorities we have for how we’re going to innovate, the kind of innovations we’re going to do, and this is where we’re going to place our chips.” At a very simple level, that’s what an innovation strategy is. — Gary PISANO

Gary: I mean, they have a lot of skills and capabilities that often get overlooked, just things that are in some ways written off as blocking and tackling, but they’re incredibly important. So, logistics and distribution, salesforce that can cover the world, and knowledge about regulations, and experts in the company — the expertise in larger enterprises is actually quite deep. I mean, I’ve been involved in a lot of smaller companies and you get great people, but you’re smaller so you don’t always have the world expert in a particular market or a particular technology, so you’re always trying to reach out. But in a larger company, you actually do have a pretty deep bench. And so, there’s people to draw from that can be extraordinarily helpful in all facets of innovation, whether it’s the technology or the commercialization, the supply chain, the marketing. And I think that’s often overlooked as well, in thinking about their advantages.

[00:04:24.19] Ben: Do you think one of the most dangerous tendencies with strategy is to apply inductive logic? You know, this idea that just because a company over here did something in a certain way, and it worked for them, therefore, it must work for our company. Because, as you say in the book, there is no magic formula for strategy, and there are no universal sets of best practices for innovation. So, would you say that’s a really dangerous road to go down, that idea of ‘because it worked here, it must work there’?

Gary: Yeah, absolutely! I mean, you have to be thoughtful. You can use analogies — and people have written about that, and we all use analogies to reason in all aspects of our life, including business and including strategy — but you have to be thoughtful about how those analogies apply and what is applying, and most importantly, what is different. A lot of times, we focus on what’s the same, but we don’t focus on what’s different. I tell this funny little story to my students about it, because they often get the analogy, and I’ll say, Well, I play a game — my daughter is now four — I played this game with her called, “Are you a bear?” And I’d say to her, “Are you a bear?” And she’d say “No.” And I’d say, “Well, do you like honey?” She goes, “Yes.” “Well, bears like honey. Do you like to swim in the water?” She says, “Yes!” “Well, bears like to swim in the water. Do you like tuna fish?” She said “Yes.” I said, “Well, bears like tuna fish. I mean, you like to play outside — you like to do all the same things bears do so you must be a bear.” That’s the analogy of focusing on what’s the same. And we laugh about it, but that’s what companies do all the time. They look at what is the same and say, “Well, this is the same, this is the same, this is the same, therefore we must be the same.” It’s like, “No, you have to look at what’s different!” It’s a logical flaw that is so commonly made in strategy-making. And so, yes, you do want to use analogies, but you want to be really thoughtful and then understand what’s different here? And then, how do you adapt your strategy to what’s different about this situation?

[00:06:27.13] Ben: How would you describe an innovation strategy?

Gary: At a very simple level, it’s a commitment to how you’re going to spend your resources or focus your resources on the kinds of innovation you’re going to go after. I always say that strategy is where you spend your money and an innovation strategy specifies very clearly, “Here are the top priorities we have for how we’re going to innovate, the kind of innovations we’re going to do, and this is where we’re going to place our chips.” At a very simple level, that’s what an innovation strategy is.

Gary: At a more nuanced level, it’s also the kinds of values you’re trying to create, the similarities or the pattern of how you’re going to address the market. So, for instance, Apple has historically focused on ease of use. That’s been part of their whole business strategy. They have historically tried to innovate, to make things easier to use. Some companies have focused on safety and that’s been a pattern over time. It’s tying the innovation strategy to the business strategy. But it creates a clear set of priorities in everyone’s mind about what’s important and what’s not important.

a lot of innovation is not about the technology, it’s about the change in the business model. — Gary PISANO

[00:07:34.04] Ben: In your book, one of the quotes I liked was you said, “Without an innovation strategy, innovation improvement efforts easily become a grab bag of much-touted best practices.” What exactly do you mean by that? Just that they’re sort of completely unconnected?

Gary: Yeah. I mean, think about today. You know, you go into a lot of companies and you say, “How are you approaching innovation?” And they say, “Well, we’re doing open innovation, we’re doing crowdsourcing, we’re doing design thinking, we’re doing empowered teams” — and these are all perfectly reasonable practices but it’s like building a car by taking a bunch of components, really good components, and just throwing them down and say, “Well, but that’s not a car, that’s just a bunch of components.” You’re connecting those practices to the kinds of innovation you’re going after. So, for example, design thinking is great, but it doesn’t work for all kinds of innovation. And so, if your strategy is about a different kind of innovation, don’t do design thinking. Open innovation is terrific for certain kinds of innovation, but not for others. So, you have to ask yourself, “Is that the right tool to solve the strategic problem we’re going after?”

[00:08:36.06] Ben: Why do you think that happens, though? Do you think it’s just because there’s external pressure maybe from shareholders or the board to be doing something? And so, it’s very easy to self-demonstrate that you’ve opened up an innovation lab or whatever. And so, that almost supplicate some of those external parties, and it’s, in reality, much harder to come up with this integrated innovation strategy?

business models are, in a sense, promises to others. So, they’re kind of a promise to your customer about what’s the value we’re going to create for you. It’s a promise to your shareholders about the value you’re going to distribute, it’s a promise to your employees about the value you’re going to distribute to them. In a sense, a business model is really a set of contracts— Gary PISANO

Gary: Well, I think it’s partly that, but I think it’s partly because we all want simple solutions to complex problems. I probably fall into this trap myself when I think about my workout regime and what I’m reading and I want the perfect training program to get me ready for a marathon with as little effort as possible. Is there the once-a-month training program that will have me ready to run the marathon or something? I think we all, at complex problems, we want simpler solutions. And I understand that executives are busy, there’s a lot of pressure, there’s a lot going on. So, that kind of magic bullet, that universal solution is very appealing. And then, what ends up happening is you have people who sell these to you. Not to be cynical here, but there are consulting firms who make their money selling you a particular tool. And so, they’ll say, “This is design thinking.” And it all seems so easy: “If you just adopt this, your problems will be solved.” And I think what I tried to do in the book is get folks to realize it’s a lot harder than that. And, as I mentioned in the book, innovation is hard. That’s the value of it. If it were easy, everybody could do it and if everybody could do it, every company would be innovative, and it wouldn’t be a source of advantage. You know, there’s a reason companies like Google and Apple have market caps, I don’t know what they are these days because the market’s all over, but, you know, close to a trillion dollars — because they’re innovative and other companies have been less innovative. And so, it’s never going to be easy but I hope to make it a little easier, or maybe not quite as hard. And so, I think we have to dispel that. I think if you go into the innovation journey with that sense of, “This is actually not easy at all, and we’re not going to sell it as easy, and it’s going to take a lot of concerted effort, and we’re going to have a lot of stumbles along the way, but it’s our strategy to get there, and we’re going to keep focusing on it”, then I think you stand a reasonable chance.

[00:10:55.17] Ben: In the book, you include an Innovation Landscape Map, which I found to be really, really useful. Can you quickly just talk us through that Innovation Landscape Map?

Gary: Sure! Yeah. It’s based on not just my research, but many, many people have worked on trying to characterize innovation in the field, for decades now. So this was really a synthesis of both my thinking and many other people’s thinking. We often think about innovation in terms of the technology and the technical dimension: how big of a leap is this, technologically, for us? Are we a hardware company that’s now forced to do software? Etc. But there’s this other dimension, which I think we’ve learned about in the last 20 years, which is, there’s also a business model dimension. So a lot of innovation is not about the technology, it’s about the change in the business model. And so, you kind of put those together and that’s how you get the two by two of, is this a big change from a technology point of view or not? Is it a big change from a business model point of view?

Gary: And I think where that gets helpful is you get these four archetypes of innovation: routine, radical, disruptive, and architectural. You can, at least, start to understand or have discussions about, what is it the lever that we’re going to push on? Are we pushing on the technology dimension because we think our business model is actually quite strong, but we need better technology or new technologies to reinforce it? Or the problem is that our business model is obsolete, and we need to radically change our business model and do more disruptive things? Or is it a combination? And I actually think the combination gets interesting, as I think many times we fail to realize how technological change has implications for our business model. We put a graft on the technology, on our existing business model, when in fact, technology changes what we can do from our business model point of view.

[00:12:50.07] Ben: One of the things that I really liked about that map is it sort of gives almost equal importance to business model and tech, which is not something that normally happens, right? And, I suppose, one of the questions is, if a company should be constantly assessing its business model in the same way it constantly assesses the adequacy of its technology, whose job is it, within an organization, to be looking constantly at the business model? Because it seems a bit like that’s a blind spot.

Gary: You have hit it right on the head! I mean, if you ask in any company who’s in charge of technological innovation, they can literally point to a person; they could say, “So and so is the Head of R&D. So and so is the Executive Vice President of R&D, they ultimately have responsibility.” Then, if you ask the same question around, well, who’s responsible for business model innovation — you’ll either get no one or everyone, which actually means the same thing. And so, you’re right. So, no organization really has that. I think that’s why Senior Executives, Senior Leaders, General Managers really need to own business model innovation. So, just like the way you think about the Vice President of R&D or the Head of R&D owning technological innovation or being responsible for it, I think the business unit leader — the General Manager, the CEO — they own business model innovation. I think that’s the only solution. I think you can have groups that help you do it but I wouldn’t want to set up a separate group called ‘business model innovation’ because it’s really so part and parcel of everything the company does that I think it just belongs in the hands of the General Manager. That’s just an opinion. People haven’t really done a lot of research on it. But I think organizations that are good at evolving their business models, it’s really, they do come from the general management, the CEO or the business unit leaders.

[00:14:40.28] Ben: It is considered best practice to spend, I don’t know, like 80% of your R&D budget on routine bets versus 20% that should go on more radical bets or whatever; that there’s some sort of pre-determined formula for deciding which of these boxes to concentrate on. But, in reality, what you say in the book is that you need to be very careful in making the allocation because allocation looks different for every company. What’s the counsel that you give to companies about where to invest across this map?

Gary: Yeah. While there’s no universal formula, there are some things you can think about, there are some factors. I mean, certainly one is, you have to look at your core technologies and really understand their headroom for improvement. So, some technologies have been around a while, they’re running out of steam, you’re running into diminishing returns, and improving them in ways that would create value for customers, that’s got to worry, right? I mean, once you start to see that — and you can map some of these, actually quantitatively, if you have certain performance dimensions, and you can look at incremental improvement, and ask yourself, how much more can we improve this? You start to see this happening in semiconductors as you reach the incremental line with reductions and Moore’s law, and you say, how much more power can we get out of this, with the given technology we have? You could start to see these things somewhat in advance.

Gary: The second part, though, is really on more of the market side: what do customers want? And what are they willing to pay for? So, sometimes technology can improve, but the customer is not willing to pay for any more functionality there. They’re saying, “I’ve got enough!” I use the example in the book about the Gillette razor and how much closer do we want to shave. And, you know, I won’t pay that much more for a closer shave because, at some point, I can only shave so close before it’s scary. But I will pay for convenience. I will pay for other things. So, you have to look at that dimension as well: where are you in the market cycle?

Gary: And then, you know, you have to look at competitive dynamics. What are competitors doing? And how are competitors changing? So, several of those things kind of come together to help you plot out where you may want to lay your chips and say, look, the opportunity for us to create an advantage and create value is maybe more in business model innovation and technological innovation. Or maybe it’s the opposite; maybe, really, our business model is pretty rich and it has got a long way to go, but our technology is not able to deliver it. Or maybe you discover in this analysis, look, it’s both — if we push the technology in a certain way, the only way we’re really going to create value is by changing our business model. And that would then get you to start to do experiments with your business model, as well.

[00:17:37.06] Ben: Do you think is harder for a company to change its business model than to change its tech?

Gary: Yeah, absolutely! Because I think the business model really gets to a lot of the core DNA, the financial DNA of the company. And business models are, in a sense, promises to others. So, they’re kind of a promise to your customer about what’s the value we’re going to create for you. It’s a promise to your shareholders about the value you’re going to distribute, it’s a promise to your employees about the value you’re going to distribute to them. In a sense, a business model is really a set of contracts. I don’t think it’s ever been formally posed that way. My economics training is in a branch of economics, it’s actually in Contract Theory — Oliver Williamson, the Nobel Prize who I heard just died this past week, who started Transaction Cost Economics. That’s essentially what I was trained on. I was a student of one of his students. So, I always tend to think about things contractually and a business model, really, is a set of contracts, implicit, if you will, promises about the value you’re going to create and capture and distribute. And a business model change means changing those promises and there can be costs to changing those promises. Your shareholders may say, “Well, we don’t like that. That’s not what we signed up for.” Or employees may say, “That’s not what we signed up for.” You may have unhappy employees and that can get costly if you have to make changes there. And sometimes customers don’t like it. We’re living this now, in education, as we, in the last few months had to shift a lot of things online because of COVID. Our customers, our students were like, “But we did sign up for online. That’s not what we paid for.” I think you’re hearing this around the world, students saying, “We signed up for a different experience. That’s a different value proposition.”

[00:19:20.23] Ben: And, in some senses, is it also harder to spot when your business model is becoming obsolete? Because, in a way, if you spot that there’s a big technology chain coming, like, you know, cars are being electrified or whatever — that you have some time to react, and you can map out how that might impact your business? But, in some ways, it’s like, it’s more difficult to get the early-warning signs that your business model is not optimized, right? So, how does a company check-in and routinely test whether its business model is optimized?

Investing in flexibility when uncertainty is high is a really good idea. — Gary PISANO

Gary: Yeah. I agree. I think it can be more challenging, and I think the work of my late colleague, Clay Christensen, really bore upon this. He highlighted this issue around why companies were vulnerable. Disruption, was really, as he described it, was business model disruption. That’s why I call that ‘the business model disruption’. He was really the one who identified that phenomenon where it’s the business model change that companies can’t react to. And I think he had some things to say about that, which I think are still very relevant. For example, when you’re missing certain segments of the market, or certain segments of your customer base are defecting and don’t seem profitable, and you say, “Well, we don’t need them anyway.” That’s always a little warning sign that he mentions that when you’ve got customers that, I think he would describe it as you ‘fire those customers’, you say, “Well, we don’t need you. We have more profitable customers.” That can be the beginning of a vicious circle. I think you’re seeing some of this in some areas today. Again, the example I use in the book is with shaving, and I mentioned Gillette competing against players like Harry’s and Dollar Shave Club. I mean, they’re offering a different value proposition and I think, initially, the folks like Dollar Shave Club and Harry’s, they were viewed as “Yeah, they’re just taking the customers who are less profitable for us anyway, so who cares?” But then, it starts to grow and then it starts to become a bigger segment of the market. It’s not that it happens really fast. It’s actually the opposite. It happens really slow. Until it doesn’t. So, it’s like the boiling frog, which is, we start losing a few customers, we’re like, “Oh, I don’t even notice that.” So, I think you do need to track fairly carefully what’s happening with customers, but also, who are the customers you’re not addressing? And are there segments of the market that you’ve never thought about addressing, that might actually be quite attractive to others, serving them in a very, very different way.

[00:21:55.13] Ben: When you see that you’re kind of suffering from that kind of Clayton Christensen’s type disruptive innovation, you know, where somebody’s come from underneath, almost in your blind spot and then starts to take market share, then the natural conclusion is, you eat your own lunch or you cannibalize your own business just before the new competitor can? But, another section of the book I really, really liked was the one where you challenged that notion that is always best to eat your own lunch. And I found myself when I was reading, thinking, okay, I’ve also been guilty of this many times, and lazily thought that, okay, it’s always best to cannibalize your own business. Why is it not always a good idea to do that?

Gary: So, one of the problems with cliches like that is they grossly oversimplify in ways that can really blind us. And so, there’s really two reasons why I think that advice doesn’t always hold up. So, one is, these things, these disruptions — whether they’re business model disruptions or radical changes in a technology base that make your technology obsolete — they tend to look a lot more obvious in retrospect than they did in prospect. So, the advice of ‘eat your own lunch before anyone else’ assumes you have some foresight that most of us don’t have. And so, there’s lots of examples where companies have abandoned technologies that had a lot of room to grow and they committed the opposite error. IBM was being told in the ’80s, “Get out of mainframe computers.” Well, mainframe computers today process 90% of the world’s transaction, and they are the workhorse now if we’re talking about big data and AI. It’s all mainframes. You need a lot of big iron to do that. IBM has that. So, it’s a good thing they didn’t get out of that market. The market isn’t what it was relative to the ’60s, it isn’t what it was, then to now. I mean, relatively speaking, it’s smaller, but it’s still a good market. I mean, it’s still a very big market, and it may get bigger. In fact, it’s very likely to get bigger. So, a trouble I have with that is it gets you out of thinking about hedging your technology risk.

Gary: But then, the second thing — and it’s more troubling — is that even if you do that perfect foresight and something’s happening, there are often profound implications for profitability. There’s this assumption in the ‘eat your own lunch’ argument that the new thing that comes along is somehow got to be more profitable or as profitable. And there’s no law of economics that said that, there’s no theory in economics that said that, there’s no empirical evidence. That’s not necessarily true. So, an example I gave in the book is when digital photography came along. Digital photography hasn’t been profitable for anybody. I mean, it’s just been a bloodbath because the components are commodities, they’re out there, anybody can get them, they’re modular technologies — and it’s a bloodbath. And so, if you were Kodak and you had perfect foresight, it’s still not clear to me what you would have done to say, “Let’s get out of our really lucrative film business, to dive into this market, which is going to be a bloodbath.” So, sometimes you really are stuck between a rock and a hard place. And what I try to offer in the book is just some ways to think through those contingencies. So, you know, there are some times where the technology’s changing, or the business model is changing, but it’s going to be good for you anyway, so you might as well embrace it. Sometimes, that’s eating your own lunch to get an even better dinner, right? I mean, that’s just a better future. But sometimes it’s the opposite. Sometimes the technology is changing, or the business model is changing in ways that are just not going to be profitable for anybody. It’s a lot more complex than just, “Let’s just dive right into the new thing and eat our own lunch.”

[00:25:42.20] Ben: Do you think it’s really dangerous when CEOs kind of consult futurists? I don’t know what the record of futurists is, in terms of being able to successfully predict the future, but I guess it’s small, and yet nonetheless, you see a proliferation of these people. And so, is that one of the things you advise, to just avoid futurists?

Gary: Yeah. I mean I think I sort of say that in the book, I take a real shot at futurists because they tend to look back to all the time. And the bias of somebody who’s a futurist is to tell you how the world’s going to be different. You’re not going to hire a futurist to tell you the world is going to be the same. So, in some sense, you’re getting a biased view. By bringing in a futurist, you’re basically pretty sure going to be told the world’s going to change. The world always changes. So, I think that’s true. I mean, we know that. The world will be different tomorrow than it is today and it’ll be a lot more different further out in the future than it will be just tomorrow.

startup life is consumed with the fear that you’re going out of business because you’re generally running on fumes, in terms of resources and cash. And so, you are focused on one goal — surviving. And the people you attract to the enterprise are extremely comfortable with the ambiguity that they may not be in business the next year. So, you select people who are very comfortable with that calculus. If you’re in a major corporation, if you’re in Microsoft, with 20 plus billion dollars of cash on the balance sheet, you’re not going anywhere next year. That, I think, changes some of the tension and pressure. And you cannot replicate that in a large company. — Gary PISANO

Gary: I think you should listen to people who have interesting and provocative things to say about the future. Absolutely. Because they may stimulate your thinking in ways that you hadn’t before. So, actually, let me walk that back a bit before every futurist sends me nasty emails. There are so many folks that I’ve interacted with, that are very, very, very smart. And they do have provocative things to say. I don’t necessarily think they’re right. And I don’t think the value of what they have to say is in the prediction. So, if they say something’s going to be the case with electric vehicles, I don’t bet on what their vision of the future is. But listen to what they have to say, as a way just to challenge your own thinking about what the future might hold. And I do think it’s a helpful exercise for organizations and people to constantly be thinking about that and disciplining yourself, because you’re trying to prepare and it’s not that you can predict correctly — most of the time we get things wrong — but we can start to prepare ourselves and understand where the contingencies are, and what we might do today to prepare ourselves.

Gary: For example, right now, all businesses and universities and schools are going through this. We don’t know it’s a short-term thing, but what’s the COVID situation going to be like in the fall? Should we be online? We don’t know. So, the best thing you can do if you have the resources is, prepare, create options, build flexibility, because it’s going to have a high payoff. Choosing one or the other now, when there’s uncertainty, is not a good investment. Investing in flexibility when uncertainty is high is a really good idea. So, that’s where I think it’s helpful to be listening to futurists and others, and challenging yourself and listening to scientists. And I guess, I’d have to say my bias is more to listen to people who are content experts rather than futurists. Talk to customers. Farmers could probably tell you a lot about what’s going on in the farming world. They live it. And so, go talk to them, go watch them, go watch how people live. And again, it doesn’t hurt to start to imagine some futures as a way to stimulate your thinking, but just be careful to not confuse that with a prediction or a scenario.

[00:28:56.23] Ben: Up until now, we’ve talked mostly about putting in place an innovation strategy. What you say is there’s three parts to innovation, right? The first one is the innovation strategy and then the second part is the innovation system. What is an innovation system? And how does that support an innovation strategy?

Gary: Yeah. The system is really the way you start to execute. That is really, at a very simple level, your innovation system is how you search for ideas, how you combine ideas — what I call ‘synthesize’ — and how you select. So, it’s really, how do you go from ideas, find the ideas, digest the ideas, and pick the ideas to go forward with. So, it’s really internal because sometimes you’re involving lots of external people in it, but the system provides the capabilities to execute that strategy.

[00:29:43.19] Ben: Is the key to finding great ideas this, what you call in the book, ‘intellectual arbitrage’, or surrounding yourself and maximizing the number of inputs to every decision?

Gary: What I meant by intellectual arbitrage is just exposing yourself to ideas and people who you don’t normally get exposed to. We tend to talk to people and the experts in our particular business without thinking about what others from very different fields might have to say. And they have different ways to look at the problem and that can stimulate really interesting ideas. And sometimes they’re technology ideas. So, we see things move across fields all the time in terms of technology, but sometimes it’s business model ideas. An interesting one I just came across most recently in some new research I’m doing is, during World War Two, during wartime production in the US, car companies, which knew how to do things with mass production, but did not know much about making airplanes, were actually asked to make airplanes — B-29 bombers. Aircraft companies who knew quite a bit about making planes but didn’t know anything about mass production actually learned a ton from the auto companies about mass production. So, in the 1930s, airplanes were not produced with mass production techniques, at all. I mean, some of them didn’t even have interchangeable parts.

Gary: And so, it’s a great example of learning across sectors. They were kind of forced into it, in this sort of artificial setting, but, in that case, the aircraft companies learned from automobile companies a lot about production techniques. I think those examples are out there in all sorts of settings. We see today in healthcare, for a while, there were healthcare companies trying to learn from manufacturing companies; hospitals trying to learn about quality procedures from companies who manufacture cars. And, again, one has to be careful because analogies break down, sometimes. They’re not always perfect. But there is learning. And so, the idea is, can you expose yourself and expose your organization to a broader and richer mix of people?

Gary: Now, you mentioned lots of input into the decisions. The only thing there to be careful about is you don’t want to paralyze yourself either. So, I’m a big fan of having lots of input into decisions, but you need a decision-maker to make the call and move forward. But I think, in terms of exposing yourself and getting ideas on the palate of the organization or on the radar screen, I think most organizations need to broaden where they look and who they talk to. I’ll take a good example from my own world, in education. I think we have a lot to learn from companies in the entertainment business who produce fantastic multimedia content. We need to learn more about that. We don’t talk enough to people in Hollywood or the movie industry about that — how to tell a story. Maybe cases become more like that, they may become what we write down. We don’t normally think about that as a party we would talk to. But I certainly know that in my own experience as an academic, just the interactions I have with people outside — I’m trained as an economist and I work in a business school — but interactions with physicists interactions with people who do artificial intelligence, scientists or biologists. That’s where I suddenly get interesting ideas that connect back to my own field. So, it can be very, very stimulating.

[00:33:20.29] Ben: What you’re saying is that, if not maximize the number of inputs, at least you want to be exposed to different fields and different disciplines? And, at the same time, you make the point in the book that innovation is very infrequently linear, right? It goes perfectly from problem identification to solution. How does one build a system when the process is a bit random?

Gary: Yeah. So, the outcome is randomness, but the approach itself has to be very disciplined. And I use the analogy of evolution in life forms. Evolution, as a process, produces a massive variety of outcomes. It’s very innovative. We get everything from the smallest Amoeba to the largest Sequoia trees, to humans — complex forms of life. And yet, if you think about evolution, it’s a very rigorous process. It just works the same way all the time. There’s a few sets of letters in the genetic alphabet and there’s some rules for how things combine and replicate. And there’s not actually a lot of variance in the process, but there’s a huge variance in the outcome. And I use that analogy to think about, in organizations and in innovation, we want variance in the outcome, we want the breakthroughs. But to do that, we need to have a very disciplined and rigorous and repeatable process of design — test — iterate — design — test — iterate — design — test — iterate over and over and over again. And you need organizations that have not just that mindset, but you actually need processes to do that. So I think that sometimes gets forgotten. People feel like that’s bureaucratic, but it’s actually not. And when you look at how really great scientists work, they work with very strict discipline and rules. And it’s the same with artists, they work with really strict discipline and rules that they follow. The outcomes vary, and there’s creativity in the outcomes, but they’re often exceedingly rigorous and exceedingly disciplined and regimented in their approach.

[00:35:27.10] Ben: I’m not suggesting there’s an inconsistency, but on the one hand, you suggest in the book that you can’t just take a large bureaucratic organization, break it into smaller parts, and then to quote you, “it becomes magically endowed with entrepreneurial spirit.” That’s a fallacy, right? But, at the same time, you say, to do innovation, you need self-structures, you need temporary teams, you need project teams. So, what’s the difference between decomposing an organization into small parts and running project teams or small teams?

Gary: Yeah. Again, nothing wrong with small teams. I like small teams and you can do them in big companies. But I think the point I was trying to make in the book was that many times, companies confuse what is a cultural problem for a structural issue. So, they say, “We’re bureaucratic, and we’re slow, so let’s break this down. Let’s attack it structurally. Let’s make these smaller units. And now, suddenly, we’re going to be like a startup.” And the answer is, no, you’re not. You’re just going to be smaller versions of your old bureaucratic self. It’s actually hard to recognize what you can’t replicate about a startup. So, startup life — and I’ve been involved with startups, I’ve been a co-founder of a company, I’ve served on the boards of startups — startup life is consumed with the fear that you’re going out of business because you’re generally running on fumes, in terms of resources and cash. And so, you are focused on one goal — surviving. And the people you attract to the enterprise are extremely comfortable with the ambiguity that they may not be in business the next year. So, you select people who are very comfortable with that calculus. If you’re in a major corporation, if you’re in Microsoft, with 20 plus billion dollars of cash on the balance sheet, you’re not going anywhere next year. That, I think, changes some of the tension and pressure. And you cannot replicate that in a large company.

everybody loves the discipline until that discipline is applied to them — Gary PISANO

Gary: If you’re a large company, let’s think about what it is you really think make startups innovative — those are the things you can borrow. Create a sense of urgency. We’ve seen that in large companies. Today it’s fascinating what’s going on there. Big companies are being forced to be very urgent, because their worlds got changed dramatically. Look, I come from an academic institution that’s… Well, it’s a University — Harvard University is 350 years old or something and Harvard Business School is 100 years old — and we had to go online in a two-week period. Our students were on spring break and when the University president said because of COVID we could not have classes in-person, it would be risky and irresponsible. And so, in two weeks we had to figure out how to deliver education online. I think, if you had said to me last year, could that happen in a two-week period? I would have said no. But it had to happen. So, we made it happen. That’s the sense of urgency you can get. So, in a big company, you can do it. And we’ve been seeing this happen. So that’s what I encourage companies to do is, forget the whole startup thing; focus on the key attributes of innovative cultures — and those are some of them.

[00:38:23.12] Ben: When you talk about culture in the book, you talk about the paradoxes of innovative culture. One of the quotes you say is, “When it comes to innovation, the candid organization will outperform the nice one every time.” I suppose the question here is, how do you stop candor becoming aggression?

Gary: Yeah, great question! And absolutely you have to do. I mean, you have to watch for it. If you’re the senior leader, this is where you have to just be really attuned and you have to watch the visual cues — it’s a little harder these days if you’re remote — you’ve got to be able to, if you’re in the room, watch the body language of how people are reacting and be prepared to step in. And you have to model it yourself, that delicate balance of treating people with incredible respect and dignity but being very clear about what you think is a good idea, what’s working, what’s not working, how things can be improved. It is a delicate balance, and in an organization where people are passionate — which is what we want them to be — emotions get involved. And we know that emotion can get the best of us, at times, in a negative way. So, I think, as a leader, you have to be really comfortable with stepping in and being able to pull somebody aside and say, “Look, Ben, you were a little rough in that meeting. I get your point, but you might have ventured into, you were just brutal, not brutally candid, which is different. We’ve had the good argument, we’ve thrashed this problem out 100 different ways, and now we’re going to move forward and we’re still connected.” I think you have to build good personal relations between people in the company.

[00:40:14.07] Ben: So you need obviously candor with respect but if you don’t have the candor, then you’re just going to move too slow, because you’re going to be too nice and you’re not going to get to the point, and the whole pace of change will be too slow. Is that it?

Gary: Absolutely! And problem-solving requires candor. It’s, how do we make this better? You have to tell me what’s wrong with my idea. If I give you a book of mine, to read my next book, I give you the manuscript and you say, “Great job! Great job!” Yeah, you just don’t want to hurt my feelings. But that’s not going to help me. But if you say, “Look, I’ve got to be frank with you. Here’s three points in the book that don’t make sense at all” or “I don’t understand” or “They’re badly written” or, “They don’t add anything”, whatever. And you are clear about it. I might not want to hear that. In fact, I’m pretty sure I wouldn’t want to hear that. But the only chance I’d stand to make the book better is actually hearing that. That’s why candor is so critical to innovation. For any creative process, and particularly for innovation, it’s extraordinarily important!

[00:41:14.07] Ben: There’s another great quote I loved from the book, where you say, “An organization chart gives you a pretty good idea of the structural flatness of a company, but reveals little of its cultural flatness.”

Gary: Yeah.

[00:41:24.25] Ben: How do you lever this culturally flat organization?

Gary: That’s where the leader’s behavior is everything. What are their expectations of you and others and their role and how much autonomy they really give you? So, in some organizations, leaders make it clear that they want to be involved in every decision. So, I don’t care what the org chart looks like, it’s not flat. And they’re going to get involved with every detail, and people are going to learn and be conditioned over time that ‘you’d better ask the boss before you do anything’. In other organizations, the leaders say, “Look, here’s the direction I want to go on. I think I’ve made it pretty clear the general direction or the principle or the strategy. It’s really up to you how you do that. And it’s really, within broad latitude, I just want you to go forward. And if you need my counsel, I’m absolutely willing to provide you that counsel and help you, but don’t feel you have to ask my permission.” So there’s clear boundaries about where you have to ask permission and not. “I trust you.” It’s trusting people to make decisions, and then giving them feedback on those decisions, later.

[00:42:27.22] Ben: Two other paradoxes I wanted to pick up on. One is this idea of, you call it ‘tolerance for failure, but no tolerance for incompetence’. If you’re going to do experiments, you have to be allowing competent people to do them, right?

Gary: Organizations that are innovative have really high standards of people. So they draw a distinction between, something failed because biology got the best of us or physics got the best of us or the market. We tried something new. They draw a distinction between that and just, we were sloppy. We did a bad design. We did bad engineering. I didn’t motivate my team well. I didn’t listen to people who were giving me an impact. That’s incompetence. We’re not going to tolerate that. Innovation is hard enough. And that’s a harder edge. Everybody loves tolerance for failure but when organizations start talking about, look, we’re also not going to tolerate incompetence, that’s a scarier environment to be in, for a lot of people.

[00:43:28.13] Ben: You also talk about how there’s a given that experimentation is good, but you argue very strongly that, if you’re going to experiment, those experiments need to be bounded by a sense of what they’re going to teach you and how much you can afford to lose through those experiments, right?

Gary: So, it’s, what are we experimenting? Why are we doing this? And then, we’re going to generate data. We have to treat the data as sacred. We can’t just run an experiment, look at the data, and say, “Well, that’s not what we wanted. Let’s do this. Let’s keep doing it.” You have to ask yourself, if you’re getting results that you didn’t expect or that are less than optimal, why is that? What’s going on? And learn from it. And that’s the discipline. And I think there’s got to be a real discipline to experimentation. And everybody, again, loves the discipline until that discipline is applied to them.

[00:44:19.11] Ben: One of the things you said in the book is, as a leader, you have to be great at strategy, execution, and culture. And what I wanted to ask you was, how many people does that apply to? And then, do you think that kind of leadership only really comes in waves? I don’t know if you have ever read that Steve Blank article where he sort of says, you get one wave where somebody is great at innovation, and they surround themselves by people who are great at execution, and then when that person retires, or leaves, then you have a period where the company kind of sweats the asset or milks the existing innovations. And then, there’s not until the next generation of leaders that you then become innovative again. So, sorry to ask such a long question, but do you think it’s really difficult to have those qualities in a leader? And do you think they come in waves?

Gary: I agree with that observation. I do think they come in cycles. I think what happens is you do get the visionary leader, the innovative leader, who then surrounds themselves with people who are execution-oriented to kind of counterbalance them, which is probably a reasonable thing to do. But then, the problem is those people become the heads of the company, and there’s less innovation. And then, the company gets in some trouble and an innovative leader comes back. I think Microsoft’s a great example. I mean, I think they’ve gone through that cycle. How many leaders are good at strategy, systems, and innovation? It’s a great question! Probably very few. I think, as a leader, your task is three-fold: you’ve got to master strategy, you’ve got to be a good architect of the system, and you’ve got to be a good architect of the culture. But if they had to choose, I’d say, focus on strategy and focus on culture. Systems — there’s enough other people who can probably help you get that right. So, focus on strategy and focus on culture.

[00:46:06.16] Ben: We’re in a world now, where, the pace of change is constantly accelerating, we’re on a treadmill. And sustaining innovation is kind of like the new source of sustainable competitive advantage. Do you think that’s fair? I.e., this is really what makes or breaks companies today, and therefore, the leaders that are good at this kind of almost deserve to be paid whatever they’re paid, because this is just so critical?

Gary: Well, I want to be clear, because in terms of sustaining innovation means — and Clay Christensen used that term, ‘disruptive versus sustaining’. I’m not talking about sustaining innovation the way he did it. Sustaining your capacity for innovation is critical. I mean, that is what is really, I think, the skill that is in scarce supply. So, it’s not just being good at innovation. It’s building an organization that is capable of innovation. I think that’s the fundamental difference. The leaders should worry about building the organization that’s going to outlast them.

[00:46:57.09] Ben: So, the way you finish the book is you talk about innovation as agency, right? So, we all have a role to play in innovation. Is there a way for us to become, as individuals, in a practical sense, for us to become better at innovation and also to make our businesses more innovative?

Gary: Yeah, absolutely! Look, innovation starts with yourself and organizations want us to be innovative. I’m not innovative, but I want other people to be so. So, you kind of have to open it yourself, for sure. But I think, how do you do it individually, and in all walks of life? I go back to some of the things I talked about in the book: expose yourself to a wide range of people and ideas. So, get out of your comfort zone, get yourself in contact with people you’re not normally talking to. I think that’s probably the most important thing. The second thing is, get comfortable yourself with experimenting. And I think we’re all trying things and learning from them as an individual skill — getting comfortable with that I think it’s a prerequisite for having your organization be comfortable with that.

Gary: There’s lots of these things individually, you can practice. I mean, you can practice candor and learn how to do that, and challenge yourself to start to follow some of those cultural attributes. Get yourself comfortable with receiving candid feedback and not taking it too personally when your ideas are criticized. Learn how to do that. And again, I think some of it is, get yourself in situations where, if you’re outside your comfort zone in something you’re doing individually, that you’re not going to be very good at, and that you’re going to fail at it, and you’re going to learn that humility that comes from it — I took a drawing class two years ago. I’m a terrible artist, but my wife is an artist. So, she was taking me to a drawing class, and I took it, and I failed a lot at it, but that’s okay. I mean, I think it’s no fun to fail, but you have to realize that failing at things isn’t so bad — and innovating requires that. So, if you get comfortable with some of that yourself, you’ll become a more innovative person in everything you do. I think that, in an organization, you will be a better agent for innovation.

Ben: Fantastic! Gary, thank you so much for coming on the podcast and sharing all of your insights from your book! Just to reiterate, Gary’s book is called Creative Construction: The DNA of Sustained Innovation — and we highly recommend it!

From Scalable Efficiency to Scalable Learning (#22)

From Scalable Efficiency to Scalable Learning,
w/ John HAGEL

We are speaking with John Hagel, who has been working with the most successful companies in Silicon Valley for 40 years (also a startup founder of his own). John is the author of several books — including The Power of Pull he co-chairs Deloitte Center for the Edge, which is a Silicon Valley research center. In this episode, John joins Ben Robinson for a very comprehensive discussion on the zoom in — zoom out approach to strategy; why the advertise-based business model is unsustainable and the alternative; how customers’ reluctance to accept mass-market products will drive the fragmentation of product and service-based businesses; why learning in the form of sharing existing knowledge is not where the greatest value is; why John is optimistic about the gig economy — and more.

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast


  1. The Power of Pull — John Hagel, John Seely Brown, Lang Davison
  2. Zoom In / Zoom Out — Deloitte Center for the Edge
  3. Never underestimate the immune system — John Hagel

Full podcast transcript:


One of the things I’m intrigued by is the degree to which the big shift is producing a return to the past, and I think one of the interesting trends that I anticipate in the gig economy is moving to what I call ‘the guild economy’. — John Hagel

[00:01:40.27] Ben: So, John, thank you very much for coming on the podcast. I guess most listeners will know who Deloitte are, but probably there are quite a few people that aren’t quite so familiar with the Center for the Edge. So what is the Deloitte Center for the Edge?

John: Broadly, it’s a research center that’s chartered with identifying emerging business opportunities that should be on the CEOs’ agenda, but are not, and do the research to persuade them to put it on the agenda. So, we try to stay a step ahead of everybody else.

[00:02:14.11] Ben: Your work is guided, I think, in large part, through this idea of the big shift. How do you define that big shift?

John: We don’t have a single definition. We just view it as the way in which the global economy is transforming as a result of long-term trends that have been playing out for actually several decades.

[00:02:37.15] Ben: So, you mean technological trends like Cloud, mobile — those kinds of things?

John: Certainly digital technology is a key driver of the changes. I’d say the whole movement towards the freer movement of people and goods and information across boundaries on a global scale is another factor; the increasing power of customers is another factor. So, there are many forces that are coming together to shape the big shift.

[00:03:09.13] Ben: And this big shift, you would argue this is as big a shift as the move from an agrarian to an industrial economy? It’s that kind of magnitude of shift?

John: It is. I mean, I think that often we hear the phrase or some framing of, “We’re in industry 4.0”

Ben: Yes. It’s the World Economics Terminology, I think.

There are two very different time horizons: 10 to 20 years, and 6 to 12 months. When you think about the way most companies talk about strategy, it’s the five-year plan, right? It’s year one, year two, year three, year four, year five — that’s their strategy. [While Big Shift] companies spend almost no time on one to five years. It’s all about 10 to 20 years or six to 12 months. And their belief is that if they get those right, everything else will take care of itself. — John Hagel

John: Yeah. And our perspective is, no, we’re beyond the industrial era. And the way we frame it is around this notion of a contextual era where it’s all about context — reading context, responding to context quickly and effectively — and that’s a very different way of organizing and acting on business issues.

[00:03:55.08] Ben: That’s good! I think we should now start to delve into what that really means — the big shift in the contextual era. So, maybe let’s start by talking about the role of strategy within an organization. Because, I guess, in response to faster change, a company needs to introduce more agile decision-making and you’ve written a lot about this. So, I was wondering if we could maybe start with your concept of zooming in and zooming out and how that helps to frame strategic planning horizons.

One of our concerns is everybody today talks about agility and flexibility. And certainly, that’s valuable in some contexts. But if all you’re doing is sensing and responding to whatever is happening at the moment, being flexible and agile, you’re going to spread yourself way too thin across way too many things, because there’s so much going on. If you’re just responding and reacting to anything and everything, good luck! Zoom out — zoom in helps you to focus to get a sense of what really matters. — John Hagel

John: Yes. It’s a very different approach to strategy — zoom out, zoom in. I’ve been in Silicon Valley now for 40 years, and I’ve had the opportunity to work with some of the most successful tech companies in the Valley and they have a very different approach to strategy and it inspired the zoom out — zoom in. They don’t use that term, but it’s one that I’ve used to basically describe a very different approach to strategy, which focuses on two time horizons in parallel. On one time horizon, it’s 10 to 20 years — and that’s the zoom-out horizon. And on that horizon, the questions are, “What will our relevant market or industry look like 10 to 20 years from now?” And then, “What are the implications for the kind of company or business we need to be, to be successful in that market or industry 10 to 20 years from now?” So, that’s zoom out.

John: Zoom in is a very different time horizon. It’s six to 12 months. And on that horizon, the questions are, “What are the two or three initiatives — no more; two or three — that we could pursue in the next six to 12 months, that would have the greatest impact in accelerating our movement towards that longer-term opportunity we’ve identified? And do we have a critical mass of resource against those two or three initiatives in the next six to 12 months? And how would we measure success? What are the metrics we would use to assess our progress towards that longer-term destination?” So, there are two very different time horizons: 10 to 20 years, six to 12 months. When you think about the way most companies talk about strategy, it’s the five-year plan, right? It’s year one, year two, year three, year four, year five — that’s our strategy. These companies spend almost no time on one to five years. It’s all about 10 to 20 years or six to 12 months. And their belief is that if they get those right, everything else will take care of itself.

John: And so, it’s a very different way of thinking about strategy and we believe in rapidly-changing times it’s necessary, essentially, as challenging as it is, to look ahead. You need to do that. One of our concerns is everybody today talks about agility and flexibility. And certainly, that’s valuable in some contexts. But if all you’re doing is sensing and responding to whatever is happening at the moment, being flexible and agile, you’re going to spread yourself way too thin across way too many things, because there’s so much going on. If you’re just responding and reacting to anything and everything, good luck! Zoom out — zoom in helps you to focus to get a sense of what really matters. Where are we headed? What’s the destination that we’re trying to achieve? Then, how can we accelerate our movement there? It’s a very powerful way to focus effort rather than just respond to whatever is happening at the moment.

One of the zoom-in initiatives — six to 12-month initiatives — should be focused on what we call ‘scaling the edge’. It’s finding an edge to the existing business that has the potential to scale to the point where it will become that business that we anticipate 10 to 20 years from now. — John Hagel

[00:07:30.28] Ben: And presumably, when you’re working on these different time horizons, you’re using different strategic tools to try to figure out what the world looks like in 20 years; and also, I guess, separate tools to optimize what you do in the next six to 12 months. Is it fair to say that when you’re looking 10 or 20 years out, you’re using scenario planning, kind of pulling yourself out of your comfort zone, and trying to think without constraints about what the future might be?

John: Absolutely! Scenario planning is a critical tool and very useful in terms of looking ahead and imagining all the possibilities, alternative futures. I think that the difference here is that in most scenario-planning efforts, you imagine very different futures, you may ultimately just agree on which future has the greatest probability, and then you leave; the meeting is over. In this approach, the meeting is not over until we have committed to the future that we believe is most likely — and committed to short-term initiatives based on that future. So, where this has implications for us — and it very much changes the whole discussion because a lot of scenario-planning efforts are viewed as theoretical, conceptual exercises, but they don’t really make a difference to the business today. Zoom out — zoom in has a profound difference in what you do in the short term.

[00:08:57.02] Ben: How concrete an idea or a future do you have to come up with? Because one of the things you talk about a lot in your writing is this idea of narratives versus stories. And I think the difference you draw is that a narrative is open-ended. So, can a future state be a little bit nebulous and just kind of help frame where you’re headed, kind of like the Northstar, without having to be too concrete?

John: Yeah, it’s a balancing act, ultimately. It has to be sufficiently tangible that it can help you make choices in the short term, but broad enough so that there’s room to explore and discover as you go. One example I use, most of the companies that pursue this approach don’t talk about it publicly: there was one company where it’s been written about, so I can share, and it was actually Microsoft in the early days when it was just a startup, back in the 1970s. Bill Gates pursued a zoom out — zoom in approach and the zoom out he had for his company could be summarized in two sentences: one is, “Computing is moving from centralized mainframes to the desktop”; the second, “If you want to be a leader in the computer industry, you need to be a leader on the desktop.” So it wasn’t a detailed blueprint of what the computer industry would look like 10 to 20 years from now, but it was enough specificity so that you could make really hard choices in the short-term and accelerate your movement towards the desktop.

I think the immune system, the people in the immune system are very well-intentioned people. They’re not evil, by any means; they’re wanting what’s best for the company. Their view is what’s best is to continue doing what we’ve always done. So, this notion of scaling the edge is a way to not draw out the immune system. — John Hagel

[00:10:29.13] Ben: You just said something that I want to touch on, which is, you said, you’ve got to be able to make hard choices in the short term. In this kind of strategy work that I’ve done, I think that’s one of the hardest things to get people to do, right? So let’s assume that you can galvanize an organization around the long-term vision, then getting them to make difficult choices to actually divest of some activities is super difficult. What’s the right way to approach making those short-term choices?

John: It helps if it’s short-term and it’s not massive resource requirement. So, a lot of the resistance is, if you’re talking about five-year programs and billions of dollars, that’s going to encounter a lot of resistance. We have kind of a filter that we use on the zoom inside, which is that one of the zoom-in initiatives — six to 12-month initiatives — should be focused on what we call ‘scaling the edge’. It’s finding an edge to the existing business that has the potential to scale to the point where it will become that business that we anticipate 10 to 20 years from now. So, it’s finding an edge and starting to scale the edge in the next six to 12 months.

John: The second zoom-in initiative is, “What’s the one thing we could do that would have the greatest impact in strengthening the performance of the existing core of our business? Because ultimately, that’s where the money is today and we want to prolong it as much as possible.” And then, the third one, which is the most challenging in my experience, the third zoom-in initiative is, what one major set of activities could we shut down in the next six to 12 months so that we can free up resources for scaling the edge and for strengthening the core? And that’s looking for something that is marginally profitable, has no real potential for growth. Why are we doing this? Let’s shut it down, so that we can, in fact, devote more attention and resource to the things that matter.

[00:12:41.10] Ben: And how successful are you at getting companies to do that third aspect?

John: As I said, it is certainly challenging. I think that, in my experience, having a sense of what’s that edge that we could scale and the really big opportunity we could be moving towards, and then also that there’s an imperative to strengthen the core — we can’t just continue on as we are — I think that helps to build a sense of need for shutting down. I mean, if you just say, “Let’s shut down things that aren’t very good or very profitable”, that’s going to encounter a lot of resistance. But it’s the notion that there’s actually something much bigger and better that needs and deserves the resources that we’re currently devoting to something that’s not producing great results.

[00:13:30.24] Ben: One of the articles that you wrote that we have cited the most — in fact, I’m pleased we don’t have to pay royalties to you because we’ve cited it so many times — is the one around the immune system. I think you consistently say, “Never ever underestimate the immune system!” How does one scale the edge under the radar of the immune system?

in most of my career, I’ve been a business strategist — it’s been all about strategy: that’s what’s going to win, and if you get the right strategy, everything else will solve itself. Increasingly, I’ve come to believe that it’s much more about psychology than strategy. We need to understand the emotions that are shaping and driving our actions. — John Hagel

John: It’s a great question and certainly a major focus of our work is the notion of how do you avoid mobilizing, exciting the immune system. And a general counsel to companies around the drive to change, first of all, it’s scaling the edge versus trying to transform the core because even if you see the need to do everything fundamentally differently, if you go in from the top-down into the core, and define this massive change program that’s going to take many years and a lot of money, that guarantees that the immune system is going to come out full force against you. They want to hold on to what they have, they don’t want to take risks. And by the way, I think the immune system, the people in the immune system are very well-intentioned people. They’re not evil, by any means; they’re wanting what’s best for the company. Their view is what’s best is to continue doing what we’ve always done. So, this notion of scaling the edge is a way to not draw out the immune system. If you start with a small part of the business that today is relatively modest, doesn’t get a lot of attention and you focus on short-term action and impact, that helps to build more credibility for what you’re trying to achieve and over time, in our experience, it undermines the immune system because the immune system, a lot of it is about being risk-averse. But if you can show real impact in a short period of time, it starts to overcome that risk averseness and people start to ask, “Well, wow! That’s interesting! How can I be part of that?” So it’s a way to avoid direct confrontation with the immune system.

[00:15:41.16] Ben: You have an expression — in fact, it’s the subtitle of your book, The Power of the Pull — where you say, ‘it’s all about small moves smartly made’. I suppose that begs the question, if you’re making small moves, are we not in danger of incrementalizing ourselves to death, if we’re not careful?

John: That’s one of the biggest risks these days. The focus is on the term ‘smartly made’. I mean, yes, it is small moves, but it’s with a clear sense of direction and focus on what really matters, and being very aggressive in those small moves. It’s how quickly and how much can we achieve in a short period of time? The emphasis is on ‘smartly made’ and the way to avoid incrementalism, again, is to have a very clear sense of what’s the destination, and how would we measure our progress towards that destination? What are the metrics so we’re very clear what really matters here, and then focus on how quickly are we actually making progress on those metrics?

I think the fear is definitely dominating, in my view, the reaction to the pandemic versus viewing this as a catalyst for change — John Hagel

[00:16:50.03] Ben: And I suppose those small moves might actually be quite large moves but they’re small in the sense that they involve a limited number of people so they don’t consume too many resources or invoke the immune system, the antibodies of the immune system.

John: Yeah, it’s all relative, obviously. If you’re a large company, a small move can still be a fairly large initiative, but it’s lost in the rounding for the overall company because it’s not that big and doesn’t draw that much attention. So, I think that’s the focus is really not trying to excite that immune system.

[00:17:31.02] Ben: And it seems like, listening to you, there are two parts to not exciting the immune system. One part is doing something which is relatively small so it doesn’t consume too many resources or bump into too many people or too many budgets. But the other part is around fear, right? Because, as you said, it’s perfectly rational — at least it’s rational in the context of what we’ve been taught in the business school, etc. — to not cannibalize revenue streams, and to pursue things that can double-down on things that work. So, I suppose, is countering fear also done through narratives?

John: First of all, I think your point about fear is absolutely spot on. I say now that in most of my career, I’ve been a business strategist — it’s been all about strategy: that’s what’s going to win, and if you get the right strategy, everything else will solve itself. Increasingly, I’ve come to believe that it’s much more about psychology than strategy. We need to understand the emotions that are shaping and driving our actions. And in the business world, again, the culture we have today is emotions are a distraction; focus on the numbers and do the analysis and everything else will solve itself. But I think in that context, this notion of narrative has become a key piece to our approach, which is… And again, I’m sorry if I go on a bit, but I make a big distinction between stories and narratives. Most people use the terms to mean the same thing. For me, a story is self-contained: it has a beginning, a middle and an end to it. It’s over the end. And the story is about me, the storyteller, or it’s about some other people. It’s not about you in the audience. You can use your imagination, figure out what you would have done, but it’s not about you. In contrast, for me, a narrative is open-ended — there is no resolution yet; there’s some kind of big threat or opportunity out in the future, not clear whether it’s going to be achieved or not, to be resolved, and the resolution hinges on you. It’s a call to action to the people who are hearing the narrative to say, “Your choices, your actions are going to help resolve this narrative. What’s it going to be?” And I think, in that context, if I focus on opportunity-based narratives, that helps to inspire people and excite them, and helps them to overcome their fear and act in spite of their fear.

John: One of the reasons we’re such strong proponents of the zoom out — zoom in approach is because if you think about it, at one level, it’s not framed this way in the strategy domain but you can think about the zoom out as framing that opportunity out in the future. What’s that really big opportunity that we could focus on and become over time? And then, it focuses people on short-term action and impact, which helps to inspire people — there’s a really big opportunity out there — but also overcome the skepticism that many are going to have who are afraid to say, “Well, wait a minute! That’s just fantasy. That’s never going to happen.” “No, we’re actually having an impact today, we’re making progress towards that opportunity. Come join us.” So I think it can be a powerful way to address and overcome the fear.

[00:21:11.24] Ben: The companies you’re working with at the moment, how good a job are they doing? Or how tough is it to translate this pandemic, into an opportunity and not into something to be fearful of?

It’s early days, still, but my counsel to companies is, find alternative approaches to advertising-based business models, if you really want to build trust and deeper relationships with your customers. — John Hagel

John: It’s hard to generalize, but, at least, in my experience with the companies that I’m dealing with, it’s still very much driven by fear and short-term focus, understandable at one level — I mean, many companies are struggling to make payroll for the month and continue to exist. And so, that definitely holds people back to a very short-term time horizon and just focusing on survival versus how can we learn from this? What are the things we could change that would help us to become even more effective and successful in the future?” So, I think the fear is definitely dominating, in my experience, the reaction to the pandemic versus viewing this as a catalyst for change.

[00:22:15.17] Ben: I want to slightly shift gears if that’s okay. So far we’ve talked about evolving strategy in response to the big shift. Now, let’s just focus a bit on how business models need to change in response to the big shift. I think you’ve written a lot, and I think you’re one of the earliest people to flag this, which is, in a lot of the platform business models we see today there’s this kind of inherent conflict between the consumer and the producer because in the middle you’ve inserted an advertisement, right? So, I think you’re one of the first people that I can quote, who was starting to question the sustainability of these “free models” that depend on that advertising revenue because they introduce that conflict of interest. But, I suppose, we haven’t yet seen. I mean, I think for a long time we’ve anticipated that maybe Facebook was about to move into negative network effects, but it hasn’t really happened. Do you still subscribe to the view that these advertising-based business models are inherently unsustainable? And when do you think we, as consumers, wake up to this? And when do you think these business models start to perform worse or not as well as they have done?

John: Yeah, there are a lot of challenges with the advertising-based business models. I think, certainly, one of them — and it was the whole focus of the book ‘The Power of Pole’ — was advertising intrinsically is a push-based model. It’s all about how to intercept people, get your message, push your message to them, push to get attention. Our belief is that model is increasingly challenged. The number of options that are trying to push to get our attention is significantly increasing and we, as customers, are becoming overwhelmed with all the attempts to reach us. So, I think that’s one piece to the puzzle. The other piece is that it goes to the notion of trust and perception of what interests are you serving when I interact with you? Is it my interest? Or is it somebody else’s? And, intrinsically, in an advertising-based business model it’s the advertiser paying the bill so the attention and focus are going to be on their needs and what do you need to serve them? It’s an interesting question.

John: I do see early signals. Again, I don’t think it’s a massive movement, yet. But, if you look at, for example, the adoption of advertising blocking software on the Internet, it’s skyrocketing. It’s significantly expanding. More and more people are using that to block the ads that are coming in. I think there’s also, again, early signals, but a lot of people who are active users of some of the social media platforms are pulling back and now saying, “Wait a minute! Do I really want to share this? Can I trust that it’s going to be used for my benefit versus somebody else’s?” And then, the other thing is the growing call — and again, I think it’s early days, but it’s enough evidence out there — that the mobilization of people for the regulation of online businesses and around data capture and around advertising and all the rest suggests that people are less and less open to having that model and having their data being used for that purpose. It’s early days, still, but my counsel to companies is, find alternative approaches to advertising-based business models, if you really want to build trust and deeper relationships with your customers.

[00:26:15.14] Ben: What you paint is this alternative or a better model is a model where you have alignment, right? So, I’m helping you to make better decisions to find products or services that are better suited to your needs. And so, it’s a model where I very clearly give you the consent to use my data in exchange for you doing something that will benefit me. So there’s total alignment, there’s trust, and also, an expression that you use, “In our attention-stuffed age, it’s about helping us to get a higher return on the attention that we afford to your platform.” So I can definitely see how that’s the next model to triumph. And I listened to everything you say about regulation and people turning on ad blockers, but we haven’t yet seen, as far as I’m aware, anybody who’s really profiting from this new idea of a trusted advisor or an intermediary. Have you seen examples in the marketplace that are really starting to work?

John: Not in any massive way. I mean, I think there are, again, early signals. I’m frankly, frustrated. I’ve been talking about these opportunities for quite a while. The challenge is it requires a massive cultural shift for a company to really address this opportunity. And the focus is, again, much more on the scalable efficiency and just doing things faster and cheaper and more incrementally. So, I think some of the early indicators — again, not perfect — there are companies in Asia that are being much more effective at mobilizing large networks of third parties to provide value to their customers, positioning themselves essentially as a trusted advisor. It’s more in the business to business space in those situations — things like the motorcycle industry, the clothing industry. So, there are some examples at that level.

the evidence is that customers are becoming more and more demanding and less and less willing to accept something that’s standardized, mass-market product or a bundle of things, some of which are good and others that are not that good. We want the best in whatever product or service category we have a need for and we want something that’s the best in the sense of addressing our individual needs, not just the mass market or even a large segment, but our specific needs — what would be the best product or service? In that context, we believe that that is a force that’s going to drive fragmentation of product and service businesses. — John Hagel

John: I think, one that’s intriguing to me, although, again, relatively early stage — not in terms of time, but in terms of real development — is what Johnson & Johnson has done with Baby Center website: they invite parents with small children, babies who are experiencing a very challenging life event and offering them a space to connect with each other and get help from each other, learn from each other about how to be more effective as a parent with small children. And so, I think it’s this notion of, again, being proactive in connecting the customers with people who can help them. And, at least in the US, that’s become a go-to place for millions of people. Parents with small babies are going there because the word is spread. And it’s the power of pull in that case because they’re not doing advertising for this website. The word is spreading — a parent with a baby has a friend who just had a baby and says, “You need to go to this website. It’s really helpful.” And so, it’s word of mouth and this draw because it’s so helpful to the person.

[00:29:43.27] Ben: Yeah, with that Johnson & Johnson example, I think you’ve more or less answered the question I was going to ask you, which is a kind of a paradox — and I know you like paradoxes — this idea that you could imagine I have your trust and in exchange for you sharing your data, I’m giving you useful information back. But without engagement, people won’t return enough to the site and won’t show enough data to make that site truly useful. But I think you’ve kind of answered it, which is, it has to be both, right? You have to achieve trust and engagement at the same time, otherwise, you won’t have a big-enough factor, and enough data to be able to be really useful to people’s lives. And I guess also, the social aspect helps with what you term as ‘scalable learning’ — which is, it’s only through many-to-many interactions that you can learn fast enough to really materially improve the learning curve, materially move up the learning curve.

John: It’s definitely complicated. I don’t suggest this is easy, at all, but another example that I use — and again, this is from quite a while ago, in the mid to late 1990s — a company here in Silicon Valley, Cisco, making networking equipment, created an online website called ‘Cisco Connection Online’. And what they were doing was they were inviting prospects — people who were interested in their equipment — to go to this website. And what they would do on the website is they would start by asking two or three questions — just “Tell me something about yourself.” And then, based on those questions, they would immediately provide tangible advice and value back to that prospect, to say, “Okay, based on that, here are the kinds of things you should be thinking about and why those could be valuable to you.” But then, they would ask another set of questions. And it was this notion of rapid staging to build trust, that you’re not presenting them with a five-page questionnaire or survey. It’s two or three questions; they’re providing real tangible value back to them, and then, based on that, asking for more information. And the experience was customers were more and more willing to share more detailed information about themselves because they were getting real value back in return.

John: And another piece to the Cisco platform, which was, I think, an important part is, based on the answers to the questions, Cisco would start to connect you with experts based on your needs. So, they might come back and say, “Well, based on your answers, you haven’t really clearly defined your need yet. You could benefit from having a consultant work with you to really frame the needs that you have. Here’s a consultant that you might consider.” And they make an introduction and connect the customer with a third party. Cisco had 40,000 specialists or experts within their network that they could connect customers with. So again, word spread among people who were interested in networking equipment that if you go to that Cisco site, it’s really helpful. It can help you figure out what you really need. And then, once you figure out what you need, another key piece to this platform was, once you bought the networking equipment you had needs like staging the site, the location for the networking equipment. So, Cisco would connect you with a specialist who could prepare the facility for the equipment, training people — people who could come in and help train your employees to get more value. So after the purchase, it was continuing that focus on how to help the customer get more and more value from the products that they had purchased.

while we see fragmentation in the product and service businesses, we also see concentration in a set of other businesses, starting with things like running data center operations, logistics — businesses where there are significant economies of scale, and network effects that can really drive scale over time. And, in fact, part of the reason we see fragmentation in the product businesses is because you have those concentrated resources you can tap into. — John Hagel

[00:33:40.01] Ben: I wanted to ask you about the fragmentation that is bundling. You envision a future state where we see massive fragmentation because if we move to a state where platforms are really connecting us with the optimal service of each individual, then we have much more self-heterogeneous suppliers. We actually move to a longtail-type concept where you could optimize just for a very small demographic of people in each case. Do you really think that that is going to be the end state? Or do you think you’ll always be able to bundle an inferior product with a great product, if you can bundle the pricing?

John: Yeah, again, this goes back to our view of the big shift, and the evidence is that customers are becoming more and more demanding and less and less willing to accept something that’s standardized, mass-market product or a bundle of things, some of which are good and others that are not that good. We want the best in whatever product or service category we have a need for and we want something that’s the best in the sense of addressing our individual needs, not just the mass market or even a large segment, but our specific needs — what would be the best product or service? In that context, we believe that that is a force that’s going to drive fragmentation of product and service businesses.

John: We’re starting to see it. I mean, the early-stage trend for this was actually in the digital space, where things like music, videos, software have seen exploding fragmentation, more and more options that are available for very specific customer interests or needs. And it’s starting to spread into the physical product space. My favorite example because I’m a chocoholic, is craft chocolate. Ten years ago, 20 years ago, there were three or four global brands of chocolate; that was what you had, and that’s all you could get. Increasingly, we’re saying, “No, that’s not enough. We want chocolate that’s tailored to our very specific tastes and interests”, and there are more and more craft companies — small, profitable companies. I mean, again, part of our view around fragmentation is, while these companies will be small, they will be quite profitable. It’s just that they’re not going to grow into massive, multinational companies in the way that the traditional mass-market companies did.

John: But also, I will say, too, that while we see fragmentation in the product and service businesses, we also see concentration in a set of other businesses, starting with things like running data center operations, logistics — businesses where there are significant economies of scale, and network effects that can really drive scale over time. And, in fact, part of the reason we see fragmentation in the product businesses is because you have those concentrated resources you can tap into. I don’t need a data center if I’m a small product company — I can just rent space in the data center. I don’t need to have my own trucking and logistics operations — I can contract that out. So, I can access the scale assets and resources that I need for my business without doing it myself. That allows me to stay small and profitable.

John: And then, on the other side, I think the big opportunity — which we briefly touched on, but I think is more speculative, but ultimately more interesting — is this notion of a trusted advisor. As you’re confronted with more and more choices as a customer, as you see the fragmentation of products and services and the rapid evolution of products and services, having somebody you trust, who can really help you connect to the products and services that are most relevant to you, is going to really be hugely valuable. And our view is, the trusted advisor has what we call economies of scope, in that the more I know about you as a customer, the more helpful I can be to you as a trusted advisor, versus if I just see a small slice of who you are. And the more other customers I am serving, the more helpful I can be to each individual customer because now I can say, “Well, customers like you have gotten huge value from this product or service you’ve never even asked for it.” By the way, a key role for the trusted advisor, in our view, is not just waiting for a customer to ask for something — it’s being actively challenging to the customer to say, “No, you asked for this. You really should be looking for this and here’s why.” Or “You haven’t asked for anything but here’s something that could be really valuable.” So, it’s challenging to get more value for the customer.

One of the key challenges in our view is most institutions today are run by a scalable efficiency model, versus a scalable learning model. In the scalable efficiency model, the one message that every employee hears is ‘failure is not an option’. You will deliver as predicted, as expected, reliably, and efficiently. But what’s required for learning, especially learning in the form of creating new knowledge? Failure! If you’re not failing, you’re not learning fast enough. — John Hagel

[00:38:51.12] Ben: I 100% agree with that. The way you depicted the future economic state where you have a small number of players that have a very large supply side economies of scale, and you have a few number of players who have a very large demand side economies of scale. And in the middle, you have this proliferation of producers, right? So, you can borrow the scale from those people that have supply side economies of scale so that you can produce at much lower unit costs and then you distribute through those people who command attention. I think I would totally agree with that end state. I think what we haven’t seen yet is a shift in who aggregates demand. Because I think what we’re seeing is — and I totally agree with you — it just hasn’t happened yet — which is the precondition, ‘to aggregate my demand is you have to have my trust.’ And I think at the moment, the precondition is ‘you’ve got to have engagement and then we’ll pay you 40% of our revenues so we can get access to your customer’. I think that’s the bit that will change, but just I’m not sure how quickly.

John: Yeah, it’s early stage. But again, if you look at the fundamental forces reshaping the economy, our view is that that’s going to unfold over time because there’s a growing unmet need for that kind of service. We’ll see how it plays out.

[00:40:06.14] Ben: I want to talk to you next about lifetime learning. So, clearly in the big shift — which is in many ways an acceleration of economic activity and an acceleration of change — the knowledge that we accumulate will depreciate faster, necessarily. And I think, as you said, it’s sort of almost Canute-like to just try to read more books and go to more courses. And so, what you’re saying is we have to put in place something that will achieve scalable learning. How do we do that?

John: I think most people, when they hear ‘learning’, especially executives, will say, “Well, yeah, we have training programs, we do learning.” Actually, in a world that’s rapidly changing, learning in the form of sharing existing knowledge, while it’s still helpful, is not where the greatest value is. It’s learning in the form of creating new knowledge and doing that through action in the workplace as you’re confronting new situations that have never been confronted before, and connecting with others so that you can learn faster — when you confront those situations, who can I connect with that is going to help me figure this out and come up with an approach that really would create value in this context? It’s got huge implications for how we do business. I mean, one of the key challenges in our view is most institutions today are run by a scalable efficiency model, versus a scalable learning model. In the scalable efficiency model, the one message that every employee hears — if not daily, it’s certainly very frequently — is ‘failure is not an option’. You will deliver as predicted, as expected, reliably, and efficiently. Well, okay, I got that message. What’s required for learning, especially learning in the form of creating new knowledge? Failure! If you’re not failing, you’re not learning fast enough. You’ve got to learn from the failures and figure out what the right approaches are. But again, there is that fundamental conflict between those two messages. And that’s why many companies try to just isolate the learning and innovation labs or incubation centers somewhere off on the side and focus everybody else just on staying true to the manual. So, I think that it is a massive cultural shift.

the people who are just doing work because they want to get a secure income or paycheck are the ones who are going to struggle with lifelong learning. — John Hagel

[00:42:34.01] Ben: John, what about as an individual? Because I suppose we have knowledge stocks that are also depreciating very fast. How do we learn faster?

John: I think it’s an interesting question! We increasingly are hearing in the world the need for lifelong learning because the world is changing so much, but nobody talks about why. What’s the motivation? I mean, why would somebody engage in this? It requires a huge amount of effort, it takes you out of your comfort zone. The unstated assumption, I think, is that most people do it out of fear. If you don’t pursue lifelong learning, you’re going to lose your job, you’re going to be out of work. And so, get to it. My belief is while fear can be a motivator to learn at some level, it’s not a very powerful motivator. The most powerful motivator is passion. And we have a very specific form of passion that we focused on in our research. We call it ‘the passion of the explorer’. Our belief is that people who cultivate this passion find out what they’re really passionate about and then find a way to pursue it as a profession, as a way to make a living. Those are the people who are going to learn the fastest because they’re excited by, driven by the need and opportunity to learn. They’re not doing it out of fear — they’re doing it because they’re excited about it and they’re constantly seeking it. So, our sense is that the people who are just doing work because they want to get a secure income or paycheck are the ones who are going to struggle with lifelong learning. The ones that are going to be most successful are those who are working out of passion.

[00:44:16.14] Ben: So early on, we talked about the whole move to craft, right? And you talked about chocolate and if you’d asked me to give an example, I would have talked about craft beer. But I suppose in a way, that’s a manifestation of people actually moving to do things that they’re passionate about. There’s this whole return to craft and therefore, becoming artisans and doing something they’re passionate about allows them to create this motivation for them to continue to learn.

John: Absolutely! I think a key driver of fragmentation in the economy overall is this quest for passion and many people are passionate about very creative kinds of activities and developing products that are tailored to very specific needs. But I think you can be passionate about virtually any activity. It just depends on looking inside, what really excites you, and then continuing to search for that, until you find it — and then finding a way to make a living from it. You’ll be quite successful in a world that requires lifelong learning.

Our view is that, as we move to the scalable learning model, there’s still value in connecting with people outside the organization but it’s with the objective of learning together so that we can actually rapidly improve our performance in whatever the work area is. And in that context, the notion is that the independent contractors are increasingly going to want to connect with each other because they’ll learn faster as a small group — John Hagel

[00:45:22.24] Ben: How does scaling the edge tally with, or how is it compatible with the organization, at large, learning faster? Because it’s almost something that you said earlier on, implied that you think some of these things like innovation centers and so on are a bit of a sideshow. They’re never going to achieve the large scale, systematic changes that are necessary for an organization to really learn at a much greater scale.

John: Again, it’s a challenge. I sense it’s unlikely that you’re going to get the entire core of your business to fully embrace all aspects of scalable learning because that does require massive transformation. On the other side, again, I go back to this notion of strengthening the core. We have a framework that we call ‘metrics that matter’ that can help you target elements in the core where you could start to drive some of these scalable learning principles and approaches. And the example I give for metrics that matter, is, start with the financial metrics of the company as a whole. And just as an example, revenue growth is a big challenge. Okay, let’s drill down one more level to operating metrics. What’s holding us back from revenue growth? And in this illustration, it could be, “Well, we’ve got a high rate of customer churn — customers are leaving at a rapid rate so we can’t grow revenue.” Okay. Drill down one more level to say, where in the front line is there a metric that could really make a difference in customer churn?” And in this illustration, again, it could be Call Center Operations, it could be, “Well, customers are calling us and they’re getting frustrated they’re not getting answers to their question.” Okay, now we have a very specific part of the company in the core, where there’s a big need, and it could influence the performance of the whole company. Let’s focus, again, with small moves targeted to this particular area, and say, “How could we help the customer call center operators learn at a more rapid rate in terms of addressing unmet customer needs?” The intent is to show real impact quickly and to build more credibility and support for doing this in other parts of the organization versus just customer call centers.

In a network, if you design the network and the relationships in the network so it’s not just transactions — buy low, sell high — but we’re all committed to learning faster and accelerating our performance improvement, that’s powerful as a motivation to participate in the supply network — John Hagel

[00:47:48.04] Ben: On the gig economy, again, you’re starting to craft a different narrative from the one we tend to read about every day, which is, most of the stuff you read about the gig economy is, it’s a race to the bottom, right? By not allowing people to act collectively and by putting them on different types of contracts, we just get people to work harder for less money. That’s one narrative. And I think you’re starting to reframe the narrative by saying, “That might be true today, but we’re going to see a different type of gig economy job, in time.” And then, the second thing is, we’ll start to see gig economy workers form collectives, right? Not collectives in the sense of trade unions or anything, but they’ll start to form groups where they can collaborate together in order to learn faster and achieve better quality at scale. And so, can we break that down? Can we start with why you think the gig economy will move upstream in terms of requiring different types of skills and, I suppose, creating jobs that are better paid?

John: Yeah, I think, again, it has to do with this broader focus on the big shift. In the scalable efficiency world — which is the world we’re largely in still today — the gig economy emerged largely as a result of a drive towards more efficiency: if we can take fixed labor cost and transform it into a variable labor cost, and potentially access the labor in lower-wage regions or countries, we’ll become more efficient. And that’s the gig economy. Our view is that, as we move to the scalable learning model, there’s still value in connecting with people outside the organization but it’s with the objective of learning together so that we can actually rapidly improve our performance in whatever the work area is. And in that context, the notion is that the independent contractors are increasingly going to want to connect with each other because they’ll learn faster as a small group than they will, just sitting in the isolation of their home or wherever they are. But connecting and now offering their services as a small group — five people maybe — they will learn faster, they’ll help their customers to learn faster in terms of whatever their needs are. And one of the things I’m intrigued by is the degree to which the big shift is producing a return to the past and I think one of the interesting trends that I anticipate in the gig economy is moving to what I call the guild economy, where, as you said, people with similar areas of interests are going to come together in guilds. And again, it’s not with the desire to just hold on to what they have, it’s to connect so that they can learn faster together and help each other learn faster. And that’s a very different kind of mindset or model.

In the big shift world, the winners are going to be those who learn faster. The ones who are going to learn faster are those who are more networked and connected with a broader range of more diverse expertise and resources. And so, if you’re just narrowing your connections, we believe you’re going to be increasingly disadvantaged relative to those who continue to expand their connections and harness the power of networking on a global scale. — John Hagel

[00:50:53.26] Ben: I think you’re right, and I think another reason why that might happen is because, at the moment, a lot of this gig economy is mediated based on ratings, right? So I won’t take an Uber driver, theoretically, if they’ve got a 4.2 rating versus a 4.8 rating, or whatever, or I won’t use a tradesperson if they’ve got a low rating. But if we think the gig economy is going to step up and do more and more complex work, then it’s going to be harder and harder to mediate that work just based on ratings because there’ll be much more complex deliverables, which will consist of many people contributing to that deliverable. And, at that point, I think is when it makes sense to create guilds or some sort of collective bodies because simply having a four-star rating is not going to be enough if I want you to build my home and plummet — whatever the example might be. I just think the deliverables become more complex, so it lends itself to some sort of intermediation. What do you think will happen to globalization in light of this pandemic? Because, I think one of the things that we realized was that our supply chains were much more fragile than we thought. So, do you think that will, to some extent, put the brakes on physical trade? Do you think we’ll end up reshoring a lot of manufacturing?

John: Clearly, at one level, there’s this desire to have things closer to me so that I can rely on them more. But, on another level, if you’re just taking the supply-chain mentality, and again, it’s a longer conversation, but broadly, the scalable efficiency model says, “You want a supply chain with as few participants as possible and tightly integrate and tightly specify every activity that’s done in that supply chain.” That makes for a very brittle and fragile supply chain in times of extreme events like the pandemic. And just bringing all those activities onshore, closer to where you are, is not going to solve the problem; it’s still going to be very brittle and fragile. Our belief is the real need is to expand our horizons from supply chains to what we call supply networks where you are working to orchestrate a very large number of participants and pulling them in, as needed — as specific situations arise — versus “No, I’ve just got this one supplier who depends on this other supplier that depends on that supplier.” No, it’s increasing the range of participants so you have more flexibility. And by the way, so that you can learn faster. In a network, if you design the network and the relationships in the network so it’s not just transactions — buy low, sell high — but we’re all committed to learning faster and accelerating our performance improvement, that’s powerful as a motivation to participate in the supply network.

[00:53:57.20] Ben: It’s almost self-evident, but just, as more and more activities move online, they become intrinsically more networked. And so, would you argue that what we’ve been seeing over the last few decades is supply is becoming more networked and therefore, what we might be seeing now is an immediate reaction where we’re trying to, again, put up barriers, but effectively, the secular trend towards more networks and more ecosystems will trump the immediate backlash to erect borders and become more nationalistic?

John: In the big shift world, the winners are going to be those who learn faster. The ones who are going to learn faster are those who are more networked and connected with a broader range of more diverse expertise and resources. And so, if you’re just narrowing your connections, we believe you’re going to be increasingly disadvantaged relative to those who continue to expand their connections and harness the power of networking on a global scale. So, in the short term, yes, because of fear, we may see borders come up and barriers to movement come up. But over time, our view is the countries and the areas that maintain openness and connection are going to be the ones that thrive. And over time, those who are putting up these barriers are going to realize that they’re being disadvantaged and start to reconnect again.

[00:55:30.08] Ben: I know that every one of your blogs finishes with ‘the bottom line’. So I wonder if I could end this podcast with the bottom line, which is a summary of what the big shift means — if we can summarize it. And then, the last thing is, reasons to be optimistic about how we overcome the fear and inject the optimism to make it happen.

John: Well, I’ll end with a paradox — it’s what I call ‘the paradox of the big shift.’ If you think about the big shift, at one level, it is creating exponentially expanding opportunity. We can produce much more value with far less resource, far more quickly than would have been imaginable a couple of decades ago. Huge opportunity! At the same time, the paradox is the big shift is also creating mounting performance pressure on all of us. As individuals and as institutions, we’re experiencing more and more pressure. It takes many forms: intensifying competition, accelerating pace of change, extreme events that come in out of nowhere and disrupt our best-laid plans — witness the pandemic. So, you’ve got the interesting thing that the big shift is, at one level, creating exponentially expanding opportunity; on the other side, mounting performance pressure. And the challenge and imperative, I believe, is how do we move from that mounting performance pressure to exponentially expanding opportunity?

John: And the overlay here is that mounting performance pressure induces fear, it creates an emotion of fear. I think it’s notable around the world the extent to which fear is becoming the dominant emotion. But, in that context, I think the way to move forward and move from that pressure to opportunity is around framing what I was describing as opportunity-based narratives that can really focus people and inspire people on the really big opportunity and help people to come together. I think, again, one of the key roles of narratives, the way I define them, is to bring people together saying we all need to address this opportunity. You can’t just do this individually. And that’s, to me, what gives me the optimism, is that framing that kind of opportunity-based narrative can help overcome the fear and help mobilize us to address that exponential opportunity. But it requires articulating that opportunity-based narrative.

Ben: John, thank you so much for coming on the podcast!

John: I appreciate the opportunity. Thank you! We’ve covered a lot of ground!

Seeing Around Corners (#19)

Seeing Around Corners,
w/ Rita Gunther McGRATH

On this week’s Structural Shifts podcast, we talk to the brilliant Rita Gunther McGrath, author of “The End of Competitive Advantage”. In this bestseller, she talks about how the world is moving from one dominated by organizational systems and hierarchies to one of individual superstars where a stable career means a series of gigs. Hosted by Ben Robinson, they discuss strategy, the benefits / limitations of network effects, Facebook’s failures, and more.

Full podcast transcript:



I think the more confusing things are, the more you need a strategy because it orients you, it gives everybody the potential to be aligned around a common future. It pulls you into the future — Rita McGrath

[00:01:34.18] Ben: I wanted to start, Rita, talking about your book called, “Seeing Around Corners”. Probably the key concept in the book is this idea of an inflection point. I wanted to start by asking you, what is an inflection point?

Today, we’re living in the mother of all inflection points, and everybody’s assumptions have really changed.

Rita: So, an inflection point is some change, typically in the external environment, that creates what Andy Grove used to call a 10x shift in the circumstances under which your business operates. And what that does is it has the effect of changing the assumptions that you’ve been making about your business. So, of course, today, we’re living in the mother of all inflection points, and everybody’s assumptions have really changed. I mean, the idea that we would be comfortable in the company of strangers has been with humanity forever, and now that’s been abended.

Once you have credentialing based on a skill, rather than a degree, the whole edifice of higher education collapses. It’s a bit like when the music industry began selling songs by the song rather than the album — Rita McGrath

[00:07:34.14] Ben: And you also talk about the 6-months, the 12-month, and the 18-month metrics that would indicate which of these boxes, these quadrants we’re moving into. So, for example, if we were going to get to this new Great Society 2.0, what might be the sort of metrics that will indicate that? I suppose Joe Biden being nominated President might be one.

The whole notion that we compete in an industry is a bit narrow. And what we’ve seen certainly over the last 10–15 years is industries competing with industries. What industry is Facebook? Is it a media company? Is it a publisher? What is it? And yet, it’s soaking up much of the advertising revenue that provided the oxygen for many news businesses and entertainment businesses and so forth. So, in defining yourself very narrowly as an industry player, I think can create blind spots

Rita: And I think what a lot of people don’t understand is the inside higher ed — and I’ll just stick to higher ed for a minute because I think at lower levels it’s different than this. Inside higher education, the faculty all jockey to have their courses included as part of the required courses. Well, why do you do that? Is it because “Oh, the student must have this in their blood”? That’s the cover. But the real story is, if you have required courses, you have to deliver, and that means you have to hire faculty to teach those courses, and that means you get more faculty allocation than you would if you didn’t have a required course. So, a lot of the structure of what we’re teaching is designed for the faculty, it’s designed for the benefit of the institution, not for the benefit of the students. And so, to me, that’s very vulnerable. If you’re ultimately doing something that’s in your own interest and not in the interest of your customers, then, I think that puts you in a vulnerable place. Once we can have credentialing by the skill, once we can have credentials at a level lower than the degree, the whole kind of edifice of higher education really, is challenged.

if you take the sustainable competitive advantage world, you needed an innovation once every five years, and then the rest of it was all about execution. When you have shorter-lived competitive advantages, you really need innovation that’s more continuous because you need to be continually replacing your competitive advantages as the old ones expire.

[00:19:16.07] Ben: Also, I guess, that agility in supply chains might be harder to achieve post-pandemic?

The ease with which you can get into a digital business I think, actually, demonstrates the strength of one of the traditional concepts in strategy, which is you need to have entry barriers.

Rita: Well, I think what you see is when events move more quickly — if you think about the typical picture of a sustainable competitive advantage, it’s an advantage that goes on for a really long period — and if you have competitive advantages that last for shorter periods of time, that means you need innovation on an ongoing basis. So if you take the sustainable competitive advantage world, you needed an innovation once every five years, and then the rest of it was all about execution. When you have shorter-lived competitive advantages, you really need innovation that’s more continuous because you need to be continually replacing your competitive advantages as the old ones expire.

If you think about the relationship between employees and employers, back in the day the unspoken negotiation was, you gave me stability and security — and I gave you loyalty. But what that meant was that you had people who were prepared to invest literally decades in your organization. What we’ve got now is what many people have called “the tour of duty” economy. And so, you’ve got people who are migrants from company to company to company, and they are essentially free market operators. It therefore doesn’t give you any advantage that lasts because they’re always open to the next bidder when their contracts come up.

Rita: Now, why I think that’s so interesting is, it was much user-friendlier on the part of the customer, but when that digital request hit the company, there was no change required. You just responded to the digital request the same way you would have responded to a faxed request. So, the thing I think is interesting is you digitized something without perturbing the incumbent organization at the time. And then, once you’ve got that going, then you say, “Well if we’re sending digital orders, wouldn’t it be easier if we digitized the inventory? And that way, the incoming order would know what it was looking for, without a person having to go and look it up. Okay, that makes sense.” So you talk about antibodies — if he’d gone in there guns blazing and said, “We’re going to take this whole thing and digitize it all”, you would have come smack into the antibodies, and things would have gotten screwed up; I mean, things always get screwed up in a digital implementation and then it would have been, “See? It doesn’t work! I told you it wouldn’t work! The orders are all messed up, the inventory is all wrong.” Instead, what they did was they took it piece by piece and they said, “Let’s fix the fax problem. And then, once we’ve got the fax problem fixed, let’s fix the inventory-naming problem, and then once we’ve got that fixed, let’s maybe make an online store where we take out the need of a person to go pick this inventory — a customer can just pick it themselves.” But I think it’s that step by step solving of consecutive problems rather than announcing you’re going to turn the whole organization inside out — I think that’s really where it makes a difference.

if everybody you interact with is just like you, there’s a lot of overlap. So, they may be very comfortable, it may be very fun, but you’re not going to learn a whole lot

Rita: The second thing to worry about with network effects is they can increase but they can also fall away. So, a network can peel away even if it holds users in. I think Facebook is a super interesting example of that. So, what you’ve seen up until the recent pandemic is for younger people, they’ve been leaving the core Facebook product in droves. Now, they’ve been going to Instagram and other networks to do their exchanging — Tik Tok is the latest one — but you’ve got a diminished network effect, almost, there. So I think that’s the first thing.

don’t judge the quality of a strategy only by whether it delivered the results that you were looking for because that’s not always a predictable metric

Rita: Well, I think you continually have to be thinking about learning. One of the things I do at Columbia Business School is I direct a number of our executive education programs, and they’re very much about, your business education doesn’t stop at the age of 28. So, even if you have an advanced degree, even if you have a Master’s or an equivalent, I think it’s really important to keep coming back to get refreshed, to add some new tools to the toolkit, make new friends, make new network connections — all of those things are really important. And so, in the book — I think it’s the last chapter in “End of Advantage” — I really spend a lot of time on that. So, there’s a one-page quiz you can take which says, “How prepared are you?” It’s things like, “I’ve learned a new skill even if it wasn’t directly relevant to my job”, or “If I lost my job, suddenly, I know 10 people I could call that would help me find the next one.” It’s those kinds of things I think we need to be thinking about.

we have this cultural myth, almost, of the hero CEO who is going to come down and tell you what to do, and everything’s going to be fine, rather than the organization having to figure it out. I think we’re slowly realizing that the organization figuring it out is actually more of the norm.

Rita: I think it’s crucial. If you think about it, if everybody you interact with is just like you, there’s a lot of overlap. So, they may be very comfortable, it may be very fun, but you’re not going to learn a whole lot. It’s different than what you already knew.

crescive leaders are much more about discovering the organization’s capabilities, shaping decision-making, shaping decision premises, and a lot of those practices are actually much more closely associated with women’s styles of leading, for whatever reason, than they have typically been with men’s. And so, I think it’s very interesting now, as we look across the world, which countries have done well, in the midst of this pandemic? And overwhelmingly, they’ve been countries that have had female leaders.

Rita: One of the things that I find super frustrating as a person who studies organizations is you can make stupid, ill-informed, poorly advised, really dumb decisions and have a great outcome because you happened to be in the right place at the right time, you got lucky, whatever. And you can make well-considerate, very smart, strategically substantive decisions and end up with a bad outcome. So, take a company like Disney — here they are, launching their streaming service and hitting success on every possible dimension, and COVID-19 comes along, and now nobody’s going to theme parks. Well, that wasn’t their fault. And so, I think one of the things I really encourage people, really, to differentiate is don’t judge the quality of a strategy only by whether it delivered the results that you were looking for because that’s not always a predictable metric.

when your fundamental business model relies on your customers being ignorant of what you’re doing, I just think that’s a fundamental weakness

Rita: I think so. So the word “crescive leadership” was actually coined in the 1980s by my friend, Jay Bourgeois, and a co-author of his. They were cataloging leadership styles and they had four that they felt pretty comfortable with: so there was the command and control leader, and then there was the coalition builder — so four archetypal leadership. And then they ran across this fifth style, they could not figure out what to do with it. And finally, they said, “Alright, we’ll make it its own category.” And they didn’t spend much time on it, but they called it crescive, which I think is Latin for growth leader. And, you know, crescive leaders are much more about discovering the organization’s capabilities, shaping decision-making, shaping decision premises, and a lot of those practices are actually much more closely associated with women’s styles of leading, for whatever reason, than they have typically been with men’s. And so, I think it’s very interesting now, as we look across the world, which countries have done well, in the midst of this pandemic? And overwhelmingly, they’ve been countries that have had female leaders. I mean, if you look at Angela Merkel or the Prime Minister of New Zealand — calm, factual, not fear-mongering, but just matter of fact, and “Here’s what we need to do. Let’s take it step by step. And here’s why. And this is what I know, and this is what I don’t know — and I’m going to be very transparent about those things.” And it engenders trust, it engenders a willingness to cooperate, it engenders a feeling that someone capable is manning the helm — unlike the rather chaotic response of a lot of other countries.

it’s very hard to have multiple visionaries in one company. I mean, the only way I’ve ever seen that work is if you’ve got a strong divisional structure — so each visionary has their own swim lane, as it were — but at the top of the company, it’s really hard because by definition, if you talk about culture, visionaries are people who believe in let’s create the future, and if I’ve got two visionaries with two different dreams of what the future could be, it’s going to be really, really hard.

Rita: So, I have no personal vendetta against Facebook; I just think when your business model requires that your customers are basically ignorant and you contribute to that — you’re not transparent, you’re not honest about what you’re doing with the data. And then, Cambridge analytic was just this bit of the surface. And if you look at the way bad actors are using the platform, if you look at how they’re sort of washing their hands, “Oh, no, we’re not publishers. But yet, we derive a huge percentage of our revenue from the ability to reproduce news that’s created by other organizations that have to get paid for it somehow.” I don’t think their outcome in a political social sense is very positive and I think we haven’t yet quite accounted for the imbalances they’ve created in our system of interacting with each other, getting news, advertising, getting paid — that’s all kind of not come together yet. So, the reason I think they may be up for an inflection point now — it could be five years from now could be 10 years from now, but at some point, people are going to say, “This is not legitimate” and businesses, in the long run, that are regarded as not legitimate, fate has not been kind to them. So, take tobacco companies as a case in point. Once you begin to be seen as a provider of something dangerous — and in the case of Facebook, I think a lot of what Facebook is creating is social pollution. It’s just disinformation — and it’s sucked all the revenue out of legitimate news organizations. So I think at some point there’s going to be a rebalancing.

Previewing the post-Pandemic World (#17)

Previewing the post-Pandemic world, w/ Nicolas COLIN, Laetitia VITAUD, Ian Charles STEWART

Previewing the post-Pandemic World,
w/ Nicolas COLIN, Laetitia VITAUD and Ian STEWART

Today, we have a special episode for you on how the post-pandemic world would look like. We are bringing back three of our favorite guests: Nicolas Colin — Co-founder and Director of The Family, which is a platform for European entrepreneurs; Laetitia Vitaud— renowned writer and speaker on The Future of Work; and Ian Stewart — Executive in Residence at IMD Business School (an co-founder of WIRED). 

Ben Robinson interviews them separately, beginning with Nicolas, who talks about why this pandemic is so different from other crises like terrorist attacks and recessions. He also goes into why the stock market is currently doing okay — at least as of this recording — even though the unemployment rate has skyrocketed, and he and Ben talk about what a safety net could look like for the entrepreneurial age.

Laetitia continues the safety net conversation going into how much are we going to continue to value and appreciate proximity workers into the future? We love them now — are we going to continue to show them the love after this pandemic? And what about new protections for freelancers? What are we going to see in that space? Laetitia, who taught American Studies and English for 10 years, also goes into a really interesting discussion on Roosevelt and how his New Deal helped pull the US out of the Great Depression and what the chances are of something similar happening in the US, today. I’ll give you a spoiler — spoiler alert — things are not looking good! Laetitia ends by talking about how companies need to act today if they want to succeed today, but then also in the future after the crisis ends.

Ian picks up the leadership question, answering Ben’s question, “Is this a time to be brave and contrarian or is it time to just keep everything going as normal as possible?” Is China a safe haven for investors? How is the pandemic affecting US-China relations? And the perpetual question, when will China become the largest economy in the world? And is that even the right question to be asking? At the very end, we will circle back to Nicolas for his closing snapshot vision of how the pandemic will accelerate the transition to digital entrepreneurship. Enjoy the show!

Full podcast transcript:


[00:02:42.19] Ben: Nicolas, would you say, one of the biggest differences between the Corona crisis and some of the other major crises over recent years — the major difference is that there is no global leader? The United States led the response to the financial crisis and the United States led the response to 9/11, and you see very much that we’ve had this sort of balkanization of responses, right? Because, the UK was going for herd immunity, Italy was in lockdown, the United States, at least initially, wasn’t taking this very seriously — and we’ve lacked that sort of coordinated global response.

Nicolas: So, the US is a country that I’ve studied for a very long time and I’m passionate about it. I’ve traveled there a lot and I read a lot of books about its history, especially. What I find is different this time. So, one thing that’s different is that they have Trump and he’s a very unusual kind of leader to have in these difficult times. But another thing that’s very different is that the US is used to respond to crises by doing two things: one is, send troops abroad to invade Afghanistan or to invade Iraq and topple the regime there or Vietnam — sometimes it works, sometimes it doesn’t, but sending troops is easy for them because they have the mightiest military in the world. The other thing that they do, usually, is that they close their borders, which is easily done when you’re the US because they’re isolated at the other end of the world, they have two oceans bordering them, they only have two borders to close, effectively — one with Mexico and the other with Canada. And so, basically, on 9/11 they did both things: they sent troops to Afghanistan, and then they closed the borders to prevent anyone from entering the territory.

Nicolas: For the financial crisis, well, they gathered a small group of politicians and experts and economists in the Treasury building in Washington, DC — that was basically all you had to do to solve the crisis. You had to take big difficult decisions, but in material terms, organizing to respond to the crisis was quite easy. This time, none of these works. Sending troops will not solve the problem; closing the borders won’t solve the problem because you have sick people at home on your territory, on US soil; and simply gathering experts in a building won’t solve the problem because, after two weeks, we know what should be done, but it’s all a matter of implementation now — and implementation on US soil, at that scale, with so much disruption for the way people live in the US is unprecedented. I don’t see a precedent of the US being confronted with such a crisis at home and they are not equipped as a government and as a country to respond to that.

[00:05:59.25] Ben: So you could argue that it is unprecedented and would be difficult for any US institution to manage. But, in addition to that, you’ve also said the fact that Donald Trump has been gutting the institutions that would be most able to respond. So, I read “The Fifth Risk” by Michael Lewis — I read it when it came out, and I think what am I going to do is reread it because it was so sort of prescient in highlighting the fact that what was happening was almost going unnoticed, and would go unnoticed, until all the institutions were suddenly needed, which is exactly where we are now is it not?

Nicolas: I’m French and you’re British, so we both come from countries with a very long tradition of strong and respected civil service. The reason why we used to have — maybe we don’t have them anymore — very efficient and effective civil servants is because we were countries confronted with many threats and we had a colonial empire to manage. Both France and the UK had a Global Empire to manage, which requires a lot of skills and a lot of capacities — you really need that to manage such an empire. In comparison to the French and the British, the Americans never had very effective governance when it comes to implementing policy at home. They’ve had for quite some time a very effective military, but when it comes to implementing policy at home, the US government is already lagging far behind those of other Western countries or China or Singapore, for that matter. And they’re used to it and they don’t really care because most of their government is done at the local or state level and most of the problems that Americans have on a day-to-day basis are solved by the private sector or by lawyers.

Nicolas: But, a striking example is that you can’t really manage your taxes without relying on a tax advisor in the US because the government won’t help you do that. They don’t have the resources, they don’t have the people to be able to respond to every question that every individual taxpayer has. So, that’s their tradition. Their tradition is that of a limited government and a government that nobody really needs in normal times, so no one cares about the government being underfunded or too small for this very big and large country to manage. And it’s only when such a crisis happens, that they realize, “Oh, maybe we should have the same kind of government that the French or the British or Singapore has.” But you can’t catch up in two weeks on doing that — it’s a whole tradition and a whole cultural matter.

[00:09:28.21] Ben: Donald Trump underestimated the threat and then he’s had some very public disagreements with governors. It doesn’t really seem to be affecting his poll ratings too much. Do you think Donald Trump will still be reelected in November or do you think this has materially changed the odds?

Nicolas: He’s been polling at 40% approval ratings forever and whatever he does, it never goes down. And so, people say, “Oh, he’s still popular because he was that popular when he won the election four years ago”, and so, he could do it again with such a low approval rating as a person and as a leader. But what I’ve been interested in is how low is polling in other ground states like Michigan, or basically the Rust Belt where he made a lot of promises about jobs coming back, factories reopening, supporting people, etc., and those promises have not been kept and people are feeling the pain. And so, they’ve probably already decided for many of them that they won’t vote again for Donald Trump this year, which will make a huge difference because he won Michigan with 10,000 votes, I think, in 2016. And so, it doesn’t take much for him to lose Michigan and then lose the presidency — even though he’s faring well in southern states and other conservative states.

[00:11:05.14] Ben: One of the things I wanted to ask you was — you know, this isn’t just from a US perspective — how bad do you think the economic consequences of this pandemic will be? I guess it’s a really difficult question to answer because we have no idea how long it’s going to last and so on, but, would you say that people are still underestimating how profound the impacts will be?

Nicolas: I think we’re underestimating it clearly. I’m not really sure what people are expecting in terms of impact, but clearly, after two weeks, people will look around and say, “Oh, life seems to go on. I’m stuck at home. In many cases, I still have my job. I still get my pay every week or every month and probably life will go back to normal.” But what’s normal? If you reflect on the 10 years that we’ve gone through after the financial crisis, yes, most of us did get back a job and recovered on a reasonable standard of living, but everything has changed, in a way — politically, economically, financially, it’s the rise of China, it’s Brexit, it’s Trump. So, we might have to expect radical consequences to the crisis we’re currently going through. We just don’t know what it will be about.

[00:12:39.26] Ben: Why is the stock market not more materially affected. The initial reaction was quite severe, but actually, it’s been ticking back up. And if you take the NASDAQ, for example, I just looked — I’d better timestamp this, just so we’re not completely wrong. So, it’s the 9th of April and the NASDAQ is down about 18% versus its peak. In a world where we’re potentially facing 30% unemployment, how do you reconcile those two statements?

Nicolas: I wrote a long piece about the stock market to try and explain why it was faring so well whilst many people think that the economy is going in the wrong direction. I think there’s a decoupling between stock market investors and most people. We’re way past the time when everyone was investing in stocks. That’s not true anymore. Most of the money that’s invested in the stock market is invested by large institutional investors and the main reason why it’s faring so well, even in the presence of such problems, is that those people simply don’t know where to invest their cash.

Ben: Yes.

Nicolas: They’re afraid of investing it in tech companies because they don’t understand innovation and entrepreneurship in an economy that’s driven by increasing returns to scale; they’re afraid of investing it in bonds because bonds bear no interest rate economy; they’re afraid of investing it in commodities and they’re afraid of investing it in emerging markets or any market that’s not the US because they prefer to invest at home. And so, what are you left with, when you want to invest in stocks in the US? Well, it’s a lot of investors chasing the same stocks. And what do you do? If you have too many investors willing to buy the same stocks, prices go up regardless of the fundamentals and the context. I think that’s what’s happening now.

[00:14:58.01] Ben: They have the quantitative easing taking place as well.

Nicolas: Yes, yes! It has brought so much money in the hands of so many large investors that they don’t really know what to do with all that money. And we should bear in mind, as well, that because the government and the central banks are pumping up so much money in the economy as of now, many people expect it to trigger inflation. And so, you don’t want to hold cash if inflation is coming around the corner; you would rather have that cash invested in stocks and count on an upside with stocks, as opposed to cash.

[00:15:41.15] Ben: But what is true of the stock market is not true of venture capital at the moment, right? We are seeing capital exiting from venture capital and it’s making it harder, particularly to invest in early-stage companies. So, what do you see is the short to medium term prognosis for venture capital?

Nicolas: In venture capital, at the moment, is very difficult to invest at the late-stage because at the late-stage, valuations are extremely dependent on the state of the economy — and now the economy’s in very bad shape, so you can’t really put a price on a late-stage startup. And so, that prevents late-stage investors from deploying capital and because late-stage investors don’t deploy capital, early-stage investors prefer to hold on their cash and keep it to further fund the startups they are already a shareholder of. And so, if you’re a new startup and you try to pitch an early-stage investor, they’ll probably respond, “Okay, but because no late-stage investor is investing at the moment, I won’t invest in your startup. I’ll keep my capital to deploy in my existing portfolio.” So, until the economy goes back on its feet in terms of predictability, we won’t probably see the engine starting again.

Nicolas: But, on the other hand, we’re already in a period where venture capital is diversifying in terms of how it deploys capital. More and more players are learning to design debt instruments to finance tech companies that are in fact part tech companies — part traditional companies. And so, what I expect is that it will probably put traditional venture capital to a halt, but then create room for designing hybrid instruments that mix venture capital with more traditional business financing.

[00:18:04.14] Ben: Do you think the government could take a bigger role in funding startups, at least in the interim period where funding has dried up?

Nicolas: The new generation of tech companies that were born right after the financial crisis 12 years ago, the two flagship companies of that generation are Uber and Airbnb. And so, there are a lot of discussions about what explains their success. Is it the macro context or the technological wave that was the iPhone and smartphones in general, or exceptional founders that were made grittier by the crisis? I don’t know. I think the three factors come into play, which would lead investors these days to look at companies that not only benefit from the macro context, but also surf a wave of technological change, and then are led by exceptional founders that are even more ambitious by the current context. What we’re seeing is radical change already happening, because of the lockdown, in education, healthcare, real estate, housing. I think people will reconsider their choices. I think fringe options when it comes to educating your children will become more mainstream — like homeschooling or part-time homeschooling.

[00:19:41.09] Ben: You don’t think people have been put-off homeschooling by having done it for a few weeks and trying to juggle it with everything else?

Nicolas: I think some people will be put off but others will realize that it provides them with more freedom.

[00:19:56.09] Ben: It is quite liberating to be unfettered from a curriculum. Like, one day, your children express an interest in something and you can spend the rest of the day researching that particular subject that’s much freer, more interesting for the kids than sticking to a rigid curriculum. But, it is thought to be very, very tiring for the


Nicolas: But what will be happening in those spaces? I don’t predict that every kid will be homeschooled soon or right after the crisis. What I predict is that the period that we’re going through, which will last for weeks or months or more, will provide an opportunity for parents to reconsider educating their children, will provide an opportunity for teachers to reflect on their own job, opportunities for entrepreneurs to make their case that they can provide a different approach to educating children. And then, when the crisis is over, most of those will go back to normal but some people will keep in mind what they’ve learned during this period and investments will have been made in new infrastructures, new products, and those investments will lead to higher productivity which will make it possible to lower the prices and to make the value propositions more attractive. So, we have a virtual circle that will lead everyone to reconsider, and the entire school system will reach a new stage, probably with more customization, flexibility, more of an online experience and so on. That will happen in education, obviously in health care — because the health care system will be profoundly transformed by the current crisis, with telemedicine becoming more of the norm, as opposed to being the exception — and also housing I think will be disrupted because people will reconsider where they live, and how they live and the kind of home or apartment they inhabit.

[00:22:18.05] Ben: You’re saying, almost like, what people were predicting about this post autonomous vehicle world is now going to crystallize because if we work from home, we might as well work in the most attractive surroundings we can because we don’t need to be very close to other people because there is a much less sense of office work.

Nicolas: Exactly! I’m sure many people are experiencing working from home, and realizing both that working from home makes them more productive, more creative, and realize that if they work from home most of the time or part of the time, they don’t need to live as close to the workplace as before. So, maybe that’s the unexpected event that will contribute to solving the housing crisis in large, dense cities.

[00:23:10.22] Ben: I don’t think we can have a podcast with you and not talk about the safety net. You’ve written extensively about creating a new safety net for the entrepreneurial age and your book was extremely prescient in spotting the need for this new safety net. And if the pandemic has done one thing it’s once again highlighted the absolute need for a safety net for digital workers because they’re so much more precarious. Are you more confident post-pandemic or during the pandemic that we’ll now take the steps to introduce the safety net?

Nicolas: I think there are several changes on the way — some countries, and we, as a society, will probably reconsider what it’s about to work in proximity services. Basically, those proximity workers are the only ones whose job hasn’t changed much because the nurses are still in hospitals, delivery workers still have a job. And also, for those who don’t work anymore, like in restaurants — restaurants are a powerful lobby, they have quite of a political clout. And so, I don’t know of a government that isn’t helping the restaurant industry as a whole because we expect them to reopen when the crisis is over, and so we don’t want all the companies to go down. But, in exchange for all that government money that will make it possible for restaurant owners to cope with the crisis, we’ll probably ask about how much are you paying your employees and what kind of safety net do they benefit from? Maybe we could make some progress on that form because those people were left on their own during the crisis. So, I think for the first time we’re reconsidering the safety net or the social contract for proximity workers. For the first time, some governments have been deploying mechanisms to help support self-employed people, self-employed workers, freelancers and platform workers and so on — which is a first — and then many, many startups will be lifted up by the crisis and will come up with innovative financial products or innovative approaches to managing benefits or innovative real estate products that will all contribute to revealing the new safety net.

[00:26:06.27] Ben: There’s no automatic reason why we should rebuild the safety net or create new institutions post-crisis. But that definitely could be one outcome, right? Because certainly, you see that many of the politicians right now have extra political capital and whenever we have this kind of shared experience, we start to have more empathy for various sections of society. So, it does seem like an opportunity to make some quite radical changes, post-crisis.

Laetitia: Yeah! It really does! Like, thinking about new collective bargaining institutions, if you think of the supermarket workers in France, they very rapidly obtained visibility and then there was this pressure on supermarket chains to pay them more and create new protections for them, so they built all those window panes to protect the cashiers from people’s droplets and then they decided they’d pay them 1000 euros more every month — which is not so bad. And once the crisis is over how can you go back to saying, “Okay, well, you’re actually worthless. Let’s just cut all this and go back to whatever it was before. I think that’s not going to be possible because they are united, they went through something so terrible that they think in terms of “We’re in this together — I mean the workers — and we’ll necessarily have more bargaining power and think collectively.”

Laetitia: So, it was this pressure. Carrefour in France, and Leclerc and Auchan — all those supermarket chains — one after the other, they added this special premium for workers so that they can get paid extra. This hasn’t happened in other countries, yet — or maybe in a few others that I don’t know of — but at least it’s a sign, that in terms of bargaining, something’s really happening.

Laetitia: And the second thing is that we’re understanding the rule of public services and how crucial they are and how completely helpless we are without those public services. If you think of the NHS, how, in normal times, it doesn’t have enough resources and how in spectacular times this lack of resources will cost so many thousands and thousands of lives, there is no politician in the UK tomorrow who will be able to attack the NHS — even Johnson, who is now at the mercy of the NHS, literally speaking. And so, the fact that in times of crisis we suddenly saw the possibility of boosting those public services and their critical role is something that will have a political legacy beyond the crisis.

[00:29:12.09] Ben: Do you think that plays out in the United States? Do you think there’ll be more pressure in the United States to create some form of public health care?

Laetitia: Well, the United States is such a mess! Such a mess! I’m not optimistic about the US. What I think will happen is a moment of reckoning with this epidemic. Everything, all their incentives are wrong, all their system is wrong. The fact that there is absolutely no safety net encourages people with no alternative to continue to work even after they’ve had the first symptoms of the disease, so the spread will be worse. And then, lots of people who cannot even go to a doctor — there will be more deaths than in any other developed nation. And then, the economic crisis will also be worse because there is nothing to cushion the impact of the crisis. And so, even with a $2 trillion package rescue plan, which seems like a lot, but if that rescue package is meant to compensate for the lack of anything pre-existing, it won’t be enough. It won’t be enough to cushion the country from something so deadly, that it will be a moment of reckoning. I’m very, very pessimistic about their ability to do anything before the worst happens.

[00:30:50.15] Ben: The way I see it is this juncture where the US could either turn left, metaphorically speaking, and kind of push towards creating a proper safety net to prop up the population at large, or it could double-down on individualism. And it’s not clear which way it will go. I think if they had potentially a different president, maybe we might be more confident.

Laetitia: Yeah. I’m unsure that anything massive or anything radical can be done in the current political context. Number one, the candidate, the official Democratic candidate now is Joe Biden — and Joe Biden is not a radical thinker. Number two, there are a lot of things that are completely deadlocked. There’s the Supreme Court that is durably conservative and that will strike down whatever ambitious proposal comes out of Congress — and that is if Congress is majoritarian in the hands of Democrats after the next election, which is absolutely not sure because the Senate is also likely to remain conservative. So, I don’t think anything can be done in the American political context today that will be radical enough or ambitious enough to make a difference.

[00:32:12.21] Ben: What were the political conditions at the time of the New Deal? Because this does feel like this could be analogous to the time that led up to the New Deal.

Laetitia: Yes. It’s interesting! This comparison is very interesting because Roosevelt had difficulties with the Supreme Court of his time.

Ben: He did, yeah! I remember that!

Laetitia: He did, and he came up with a plan that came to be known as the Court Packing Plan, and the idea was to nominate lots of new justices to the Supreme Court because there is nothing in the Constitution that says that you have to stick to nine — which it’s just tradition, it’s an unwritten rule or tradition. And he said, “Okay, they’re all old and conservative. Let’s appoint lots of new justices and pack the Court with friendly justices.” And that, of course, was very controversial and lots of Americans attacked Roosevelt for being so shockingly radical — and this Court Packing Plan probably wouldn’t have been accepted and wouldn’t have passed. But, luckily for Roosevelt, one of these old judges died and he could appoint a new one, and at some point, there was a turn and because they had felt so much pressure, some of the other judges sort of changed their minds and started being more flexible, and more liberal. And so, they eventually let the New Deal unfold, but it was a couple of years of very, very, very difficult institutional moment and a true battle between those two branches of power. And today that’s not going to happen because I don’t see how in a few years, the Supreme Court will change. It was designed by the conservatives to be made durably, durably conservative.

[00:34:22.07] Ben: So when the lockdown is finished, we won’t just go backwards to the way it was; one reason is because, first of all, millions of people aren’t literally going to be able to get back to work because they don’t have work. We’re going to have a much bigger appreciation for the proximity workers and appreciate how important they are in our day-to-day lives.

Laetitia: Including teachers!

[00:34:41.17] Ben: Including teachers! Oh, yes! Those of us that are homeschooling appreciate teachers. And a lot of those proximity workers will have more bargaining power and the same applies to many of the public services that we’ve maybe had underappreciated in the run-up to the crisis. What other ways do you think we won’t go back to normal and we’ll move to some kind of new normal?

Laetitia: Well, when it comes to remote work, and the digital transition of large organizations that suddenly overnight had to manage differently, choose different tools to work remotely, there’s no going back to before in terms of the flexibility of work, and the fact that you don’t need to prove to your manager that you’re perfectly able to do things without being watched constantly and without being physically present at the office. So, I think that’s something that will change. A lot more work will be done at home, and in co-working spaces — and that’s a small revolution in a way because when we think of workplaces, we usually don’t think of the home as a workplace, so I think that’s a big change. And the fact that we think of home as workplace has an impact of how we view housing and how we consider housing policies and housing inequalities; it has an impact for companies on how they think of the workspace in general and ergonomic solutions, and it has an impact on how you protect workers because a lot of the workers who work from home already and who’ve worked from home before were not necessarily considered in a lot of the institutions that were created for office workers or factory workers or field workers.

Laetitia: We talked a lot about American politics, but for example, Roosevelt’s 1935 Social Security Act did not include domestic workers, because these domestic workers were the descendants of slaves and for political reasons, it was safe not to include them so as to have the support of Southern Democrats who were racists. And that’s just one example of how domestic workers were never included in the institutions that were created to protect workers. And that’s something that’s going to change because these institutions include medical supervision, ergonomics, social protection, obviously, etc. And so, now, the home will fully enter the realm of the workspaces and it’ll have a number of consequences.

[00:37:43.08] Ben: If everybody can work from home or have more flexibility post-crisis, do you think this changes the relative attractiveness of being a full-time employee versus being a freelancer?

Laetitia: I’m certain that it does and it’s an interesting development that’s happened over the last few weeks. In the UK, as well as in France, for the first time ever, there’s been talk of creating new protections for the freelance workers who will lose all their gigs, and all their revenues because of the crisis. It’s millions of new freelancers who suddenly will find themselves without any revenue. It’s more than 5 million in the UK, and something like that in France — a little less, I think — and these are workers who could have been salaried workers under different circumstances. The French government in the Rescue Package that was created, created a new unemployment insurance — a crisis unemployment insurance — for freelance workers. That’s a first! And then, the British Chancellor did the same which is even more surprising in the British context that’s less protective of workers than the French tradition. The Chancellor announced that a new protection will be created for all freelancers, up to 2500 pounds a month on the basis of whatever you earned, on average, before that — and that will create a form of precedent.

Laetitia: What’s obvious is that there is a misalignment between workers and companies now, because companies faced with this unprecedented crisis realize they want most of their costs to be variable. They want fewer long-term salaried workers — for example in France where you can’t lay off people easily — they want fewer offices with fixed costs that can actually kill them and burn all the cash that they have left. Whereas workers, on the other hand, want as many protections as it’s possible, they will want to return to more traditional forms of employment that provide more protections, that come with a better bundle. They want unemployment benefits, they want health benefits, etc, etc. And because this misalignment is going to be a bigger problem than ever before, in the context of this crisis, new institutions in between will have to be created, so that the model will look more like Sweden — companies must be able to lay-off people whenever they need to, but people must be protected and helped to find other jobs in the future. And so, in between is a better safety net that makes it possible to have a better alignment of interests between companies and people.

[00:40:59.26] Ben: Do you think it’ll be necessarily the state that creates those new institutions? I suspect it might be a combination of both because if you think about the present context, people are firing their freelancers because they can, because they’re those that have the least protection, the shortest contracts. But, many of the best people are freelancers. Therefore, for anybody who’s willing to take a risk at this present time and be slightly contrarian, this is the time to go in and find those freelancers and create some sort of organization that arbitrages that risk between employers and freelancers.

Laetitia: That’s true! But it’s too many people right now. It’s a little bit like, you know, when you’re an insurance company, it’s fine to handle normal risks, but once you have a risk that’s as big as a natural disaster where you have either the entire country or an entire region that’s completely destroyed, that’s not something that one insurance company can handle. It’s too big. Only the state is big enough to handle a risk of that size. However, you’re right. In most cases, it’s a combination of the two that will be most effective. So, you’ll have lots of players handling smaller risks and the biggest of them all, the natural disaster, the huge crisis — that’s something for the state.

[00:42:34.15] Ben: So just to return to this, we’re in a situation where a small minority of people work from home in the crisis. Now, I don’t know what the statistics are, but probably it’s a small majority of people who are working from home.

Laetitia: It’s about half and half actually; or one third — one third — one third: roughly, one third of people are unemployed, one third of all people are working outside, in hospitals or in supermarkets or working in the supply chain, and one third work remotely. Depending on the country, the figures are different, but you get the idea. It’s roughly something like that.

[00:43:08.13] Ben: So we’ve got a situation where a small minority was working remotely, and now a third of the working population is working remotely. So, a massive increase from one day to the next. How do you think people are coping? What do you think are some of the unseen ramifications of that, in terms of gender inequalities, for example? And then, what are your tips? Because you’re somebody who’s been working remotely for a long period of time. And it’s difficult, right? For example, we find it’s difficult to know when to stop work, for example, in the evening because you could theoretically go on until bedtime and you can start as soon as you wake up. And so, how do you create new parameters for remote work?

Laetitia: Well, it’s an excellent question because the tips that are usually given to remote workers are not necessarily valid in today’s period when parents have their children at home, or they have other family members at home that makes it so much harder to find the focus or even just the physical space to do their work in normal conditions. So, these are very un-normal times for the tips for remote workers to figure out how to work. So, it’s more a crisis time and you do whatever works best for you; parents may need more flexibility because they will work early in the morning or late in the evening if they have young children or they will work in shifts. If there are two remote workers in the household, and the two of them need to work then the mornings will be for the mother and the afternoons will be for the second parent or vice-versa. They will have to find a system and unlike in normal times, it’s a system that works for the household. So, there is this merger, if you will, of the private sphere and the professional sphere in a way that we’ve never experienced before because in normal times you have other institutions, like daycare and schools and nannies and you have this organization where you fit your household with lots of other players and a lot more extra outside help.

Laetitia: So this is very, very different and I’m a bit irritated sometimes by the productivity pieces that we see today about remote work as if it was a normal time, as if it was business as usual. Also, we know that in terms of, as you said, you’ve mentioned gender inequalities and in some households it’s like going back to the 1950s because all the chores, all the workload that was more evenly distributed between a woman and the outside world — nanny, cleaning woman, whoever else came for help — is now reinternalized. And when you reinternalize it, it’s rarely evenly split. So, that’s a disaster for feminism — that was the title of an Atlantic piece that was very good; it was, “Coronavirus is a disaster for feminism.”

Laetitia: So that’s one thing. But another is that in normal times, no one would champion lockdown. No one would say, “It’s best when you work not to see anyone ever.” So we know that in terms of mental health, we are going to have to cope with extremely difficult moments and it’s not about being productive. It’s about surviving. So, I would say, the usual things that I write about managing scattered teams and how companies with no office, like GET Lab or Buffer or Basecamp have found solutions to help us do without an office — those things do not apply today because it’s so different from anything we’ve ever experienced before.

[00:47:30.26] Ben: But in a way, that’s another thing that won’t get back to normal, right? Because, I don’t know how much you saw this, but a lot of companies, when they first were forced to let people work from home, they tried to impose normal office hours, and then they figured that, as you said, people were managing multiple different priorities at home, and so, they had to be more flexible. So, that’s another way in which companies have had to seed more and more control.

Laetitia: Yes! And that’s a positive thing that may happen out of this — is that if they make flexibility the new default, and if there is actually more trust in their management, then it will benefit everyone, even in new normal times because parents still need flexibility and they still need to be able to handle the workload the way they see fit and incorporate all the constraints that they have. So, that’s something positive that could come out of this.

Laetitia: If you’re a pessimistic, you may see that a lot of the companies that are forced to work remotely overnight, are replicating the managerial culture that was theirs before and so they basically continue to watch their people and there’s this software to take pictures of your worker’s screen and verify what they’re doing. And then, you have lots of managers who want to be on Zoom all the time — and if you’re on Zoom all the time, when exactly are you supposed to do your work? Or how much flexibility do you have when you’re supposed to be in meetings all day on Zoom? And so, I think that there’s a big gap between the companies that have a more flexible managerial culture, more horizontal managerial culture, and those that are still very conservative and basically replicating online the culture, the managerial system that they had at the office.

[00:49:49.13] Ben: Ian, I wanted to ask you how business leaders should be responding to this crisis? Is this a time to be brave and contrarian or is this a time to make sure that you steward your company through a difficult time?

Ian: So, I’m afraid I’m going to give you a boring answer, and the boring answer — which I think is the right answer — is only if the evidence supports to be brave and contrarian. The trick with most difficult situations, whether you’re a kid in the playground faced with someone larger than you or a business leader trying to deal with the fact that 95% of your revenues have just died as is the case for friends of mine around the world today, is to try to look at things relatively unemotionally — it’s hard to be completely without emotion when people you know are dying — but to try and be relatively unemotional and work out what you can do. It’s clarity, its analysis, but it’s also the ability to make a decision relatively quickly. And in that sense, that’s brave. When you have to make a decision when the information isn’t clear because you have no choice because your business goes under if you don’t, that’s the bravery that’s necessary. It’s just making hard decisions when you have to, quickly. I think you don’t do one thing. I think the efforts to try and make sure that people don’t lose their jobs have been admirable in certain areas, but obviously impossible in an airline or a hotel industry where suddenly you have no customers at all.

Ian: Now, I say impossible. It’s not entirely impossible. Mark Greeven, a professor at IMD recently gave us a case study about the car company BYD in China, which overnight, within 24 hours, because they had to find something to do with their employees — they didn’t want to let everybody off — became the biggest producer of face masks in the world. This is a known case study now, but it’s only two months old. Then, there’s another company in China that I follow, that switched from being a 90% — 10% offline retailer with thousands of stores to online retailer — so they were 10% online and 90% offline — switched to 80/20 online/offline within 30 days and didn’t suffer either the employment losses or the revenue losses that people expected. So I think the bravery is in making tricky decisions in tricky times. Contrarian — only if the evidence supports. And try to look at things based on data, not based on just gut feel.

[00:52:26.25] Ben: And where do you see that there might be room to be contrarian? So, where do you see the opportunities that good leaders, prepared to make quick decisions, might capitalize on?

Ian: So that’s a very general question. It depends on the sector you’re in and the industry you’re in. So, at the moment, the problem isn’t so much decision-making because the decision-making is fairly clear. Right now, the issue is data. If you’re looking at markets, people are talking about the difference between a V-recovery, a U-recovery, an L-recovery, underlying that are estimates of when we go back to work, when customers start buying things again. I would suggest that one of the things that managers of retail businesses or managers of consumer business should be doing is trying to work out how much of consumer behavior changes over the next three to six months. Short-term shocks tend not to impact consumer behavior; consumers tend to go back to doing what they did before. Longer-term shocks, things that last longer, people get used to doing new things in new ways; maybe they don’t go back to doing things the way they did before. And trying to work out now, trying to pass that now and work out what people will do or won’t do, how much they will change, how much they won’t change — is a very interesting question. So, I think, at the moment, it’s more about trying to understand what data there is and what it’s telling us before we get decisions. Everybody, at the moment, is just trying to scramble — spend less money, find new customers, keep as many of the employees as you can because it’s hard to rebuild teams. It’s doing what they can in difficult environments. The tricky bit is what happens next, and when next is.

[00:54:05.26] Ben: Is China now a safe haven for investors?

Ian: China has never been a safe haven for investors. It’s always been tough. And this isn’t against foreigners or outsiders — it’s tough for everyone in China, local Chinese included. It’s probably the most competitive business environment in the world, and there’s a lot of money from lots of different sources aiming at the same projects. So, prices have gone up. It’s never been safe. Right now, in addition to that, we have a very clear anti-foreigner sentiment, partly exacerbated by the last couple of years, but it’s been there, frankly, pretty much since the arrival of Xi Jinping. So no, it’s not a great time for investors in China.

[00:54:44.06] Ben: Do you think more investors from outside China are looking for a safe haven for their money? Because China was first into the pandemic, is first out, and the economy is kind of getting back to normal. Is this a time for people to look at China with fresh eyes, from an investment point of view?

Ian: So, a lot of the conditions that make China a complicated place to invest in are still there. It’s still an environment where we aren’t terribly sure if they respect the requirements for reporting that we do in the West. We’re still not very sure about how much of actual activity is being reported in the books, what isn’t on the books, what’s slightly off-book, or what’s on a separate set of books. And even with public companies, this has been the subject of some debate amongst analysts. So I think those conditions have always been there. The second question, I guess, is whether or not China really is coming out of the cycle. I don’t believe that the COVID-19 cycle ends until there’s a vaccine. We’re already seeing second waves in different parts of Asia, in China as well. The Chinese government of course, is blaming us on people coming back to China — either foreigners or Chinese — but it seems likely that there’s been underreporting, so it seems likely there’ll be other waves. People forget that actually the whole question of this COVID-19 cycle, the only reason we’re getting flattening of the curves is because we’re all locked indoors wearing masks and staying away from each other. Any form of return to normalcy will involve greater human interaction, which will involve an increase in infection rates. So, I don’t think we’re out of China yet.

[00:56:25.02] Ben: In other words, there’s almost no safe haven until we have a vaccine.

Ian: So, two different things. One is, what’s safe for humans who want to live in a particular place? And the second is investment. I didn’t quite get to answer your question because I was creating my usual precursors, pre-conditions for answering. The answer is yes, I’ve been looking at companies like Tencent and Baba for investment, but that’s principally companies that are quoted overseas, so I’m reasonably sure about being able to trade, and it’s large companies where we have enough access to understanding what they do and how they do it — so it’s relatively easy to judge them or even then, I would suggest that we don’t really know anything about those companies. So yes, I started to look at investment in those areas. And if you look at how they’ve done, their shares, actually, haven’t come down in terms of public market shares — they actually haven’t come down as much as you might expect. If you look at the falls in some of the American stocks, the Chinese stocks, the top Chinese stocks simply haven’t fallen as much. So, again, your question, why the government isn’t above buying shares to support its own market and its own company? So, there is this element of lack of transparency in both private and public markets for investment in China. And so, it’s always going to be tough. So, therefore, the short answer to your question is no, it’s not safe.

[00:57:40.19] Ben: Do you think that China will suffer less, economically, than some other countries because it got on top of this quickly?

Ian: Because it depends to a degree upon foreign consumption, and because the manner in which it has dealt with the crisis affects people’s perceptions of China, that foreign consumption may change. It’s one of the questions we all have about what happens when we get out of this. What are people’s attitudes to China going to be? Because they tried to shift a lot of the consumption — their internal consumption — that makes them relatively speaking, less dependent upon foreigner views of Chinese production. So, that side of the economy should do better. Yes, they’re harsher on crackdowns, and there’s been some criticism of the fact that everybody has to carry this little app, which tracks them where they go and tracks who they meet, so the government knows whether they’ve done anything high-risk, which are elements which actually are starting to be talked about in the West but are generally presumed to be not acceptable to Western cultures. The harshness of the treatment of the areas that came under the virus notwithstanding, yes, I think China’s probably going to do a better job of managing the infections and therefore probably do okay coming out. But, as I said, we’re 18 months away minimum from a vaccine. That means nothing goes back to normal. It has to change. Economies and companies and ecosystems that want to keep transacting have to adjust the way they transact, which may not be a bad thing. A lot of people started talking about how this has become a big push for those companies not already online to try and do so. And so, that side it’s not a bad thing.

[00:59:19.13] Ben: So, I don’t know when the vaccine comes, but do you think in the period up to the vaccination or the availability of a vaccine, China is better able to manage in this unstable interim period?

Ian: So, I’d separate our period from China’s ability to manage. The Chinese companies are extraordinarily competitive and extraordinarily able and extraordinarily nimble. So, when it comes to adjusting business models or adjusting supply chains or adjusting customer interaction processes, there’s no business culture on the planet currently faster than the Chinese and better at adjusting. So, from that perspective, they’ll weather almost any shop better than most Western companies. This didn’t use to be the case. The Americans used to be the best of this, let’s say a generation ago, but the Chinese are definitely stronger at that now. So yes, I think they’ll probably do fine in many respects.

Ian: One of the reasons that I was excited by China in the North-East in the early 2000s, was the degree of innovation I saw in places like the Western provinces for telecommunications, because there was so little money out there, and yet the companies were trying to create an infrastructure and an ecosystem for transactions on the telephone. So, they had to produce systems that worked on very, very little. And innovation in early telecommunications technology at the time is part of what’s driven the success with Huawei and others recently. So, yeah, they will do well, they’ll do fine. The more interesting question is whether we, in the West, will trust what they produce and therefore, continue to purchase with the same alacrity as we have done in the past. That’s an open question.

[01:01:01.08] Ben: So just leaving that question for now, do you think that the pandemic will bring forward the moment at which China overtakes the US to become the largest economy in the world?

Ian: China was always going to become the largest economy in the world by dint of its sheer size. So, with 1.4 billion people, it was always going to pass a country that was 300 million people at some point. Does it speed it up? It depends on how you measure it, I guess. They’re growing, obviously, at a faster rate than anybody has — even slowing down to 6%, that’s double than anybody else’s speed by far. So, I’m not sure COVID-19 makes a material difference to that. The short-term slowdown of the West, yes, creates issues for certain sectors, but not everywhere. So I don’t think it’s material. I think China was always going to end up being the largest, relatively quickly, and I don’t think this materially changes. I would, again, add a corollary, which is, bigger isn’t necessarily best, bigger isn’t necessarily strongest. I remember, in the 1980s, people were afraid that Japan was going to be the biggest, strongest economy in the world, and it would dominate the global ecosystem. I remember books being written about the danger of Japanese dominance of the business environment at that time — and look what happened. So, let’s see how they do what they do, and I think that will, to a degree affect how everybody else receives them. But there’s no question they will be the biggest very soon, just in terms of size.

[01:02:31.06] Ben: And then, just to dive a bit into this notion of external perceptions of China, how do you think they are faring and how do you think they will change post-pandemic? Because, on the one hand, China was seen as getting on top of this very quickly, if you like, the consumer of last resort, they’ve been providing aid and PBU equipment all over the world to countries that couldn’t otherwise source them. So, that’s the positive part of the post-pandemic perception. But then, on the negative side, people see them as the source of this virus, they see them as having covered up the extent of the virus at least initially. So, where do you think we end up post-crisis in our views of China?

Ian: I think the largest problem, the largest challenge for China is its own insecurity about what other people say about them. The Chinese government representatives at almost every level are particularly thin-skinned when it comes to criticism and that tends to mean they overreact — and they overreact in ways that we might consider surprising for the biggest guy in the room. And until they, themselves, feel a sense of confidence about their place in the world and about how they can be received, I think they’ll continually misstep or misjudge important reactions, and we will, therefore, always find them slightly off-putting. So, I don’t think that’s necessarily changed, as implied in your question. We’ve seen that mix. They had the capacity to construct and build and react, they had the capacity to supply us with things we need, and although we have poor-quality goods coming out of China, we also have very high-quality goods coming out of China. It’s just a question of making sure you choose your supply correctly and manage quality control. So, you can get wonderful quality goods coming out of China.

Ian: As you said, though, we’re concerned about what we’ve been told, we’re concerned about how certain things were managed; we, in the West, have seen video reporting on Twitter, which people in China have not been able to see about what the lockdown was really like in Wuhan — and that certainly maintains our concern about the way the country is governed. So I don’t think anything’s changed from this. The same two sides — the capacity to do good and produce fabulous equipment, gear, products, and services remains, but the insecurity on the part of the governing group and their overreaction to criticism and their style of management of crisis, because it doesn’t necessarily fit with what we consider to be appropriate, will continue to encourage us to consider China with both those sets of lenses separately and empower.

[01:05:33.07] Ben: What do you think happens to US-China relations? Because they were already pretty tense in the run-up to the pandemic — they had an escalating trade war and a worsening narrative. How does the pandemic positively or negatively affect US-China relations?

Ian: Well, again, because China was the big kid entering the playground, it was always going to be some tension, right? The previous big kid, the United States, suddenly finds someone that’s twice his or her size and acting differently — not just a question of being larger, but their interaction in the playground has been different to everybody else. So, the cultural shocks are always going to create a problem. And of course, the fact that they’re bigger and the fact that they’re going to wield larger sticks means that everybody gets nervous. So this conflict was always going to happen, it isn’t just a question of the current leadership.

Ian: Having said that, leadership can make it better. On both sides, at least, when it comes to the US and China specifically, as opposed to the West and China, we have leaders who are happy to blame the other side for something, both arguably thin-skinned, both unhappy with a pint of criticism, and that doesn’t help. So, I think good leadership, leadership of the type we’ve sometimes seen in Europe, with Angela Merkel and others, I think would help others. So, let’s see what happens over the coming years. But the current situation has certainly not made it better. I’m not sure it’s made it a lot worse. I mean, even if we had a more able diplomat on either side, whether in the US or in Asia — it might have been better handled and things might be smoother, so I’m looking forward to that as leadership changes, but that isn’t going to happen immediately, and for the time being, it’s going to be awkward.

Ian: To counter that, of course, is the interdependency. The United States still manufactures a huge amount of sub-contracts or directly manufacture a huge amount in China, and even though China has done its very best to switch economic dependency onto local consumption, they still have a need for overseas customers. I think that independency is a basis for trying to create a relationship that works. It’s one of the reasons people tried to create Europe after the Second World War having an interdependent economy — it means you’re less likely to go to war with someone if you’re genuinely interdependent.

[01:07:58.10] Ben: Do you think some of those interdependencies will diminish? Because I think we all benefited from having these just-in-time supply chains, these geographically dispersed supply chains, because it meant that the cost of goods went down. But I think what we found is their supply chains are very fragile in the face of big shocks. So, do you think some of those interdependencies would just naturally be rolled back as we seek to make supply chains more resilient?

Ian: And again, the answer is in the question. You ask very good questions which provide their own answers.

Ben: Then they’re not good questions.

Ian: People are certainly beginning to realize the risks of relying upon others in difficult times and the risk of trying to get access to something when you need it in a hurry when a normal supply chain takes three weeks, and you need it in two days. So those sorts of things, those concerns are coming to the fore at a time like this. But the answer isn’t to decouple completely and roll globalization backwards as some people would prefer. The solution is to build redundancy into the supply chains. So, you need to make sure that you have more than one route to get anything that’s important. By all means, for economic reasons, we’ll still try to go to the low cost, high volume, reasonable quality producer, but we’ve got to assume on anything that’s important that we have an alternative in the event that either we have an argument with the supplier or there’s a need for a timeframe which is shorter, which means we could accept a higher cost — there have to be redundant sources for the supply chain.

Ian: Western Europe is currently slowly trying to do this with natural gas, to reduce their dependency on Russia. It’s an issue in a lot of things around the world. But yes, COVID-19, particularly on medical supplies, has made it a more acute, obvious challenge for specifically medical issues. But, remember, these trends have been happening for a while — partly that things like Trump’s bring-industry-back-home stuff, but also, in Europe, as people have realized the challenges of trying to maintain quality control in Eastern Europe, not just China. So, there has been a slight trend to think about whether we want to produce everything halfway around the planet and what happens when we can’t get it when we need it.

[01:10:11.26] Ben: So you’re involved with lots of different companies as board member, advisor, investor. What are you telling the companies that you’re speaking to every day? How do you think they should best plan and adjust for this crisis?

Ian: It depends on where. I tend to be involved in media and/or consumer tech and/or, to a lesser degree, arts and creative industries companies. So, for most of those companies, the big thing that’s happening right now is pushing to get digital faster, especially if they were traditional media companies — it’s very, very hard to get newspaper and magazine and book companies to do more online. When you have no bookstores or your distribution methods are constrained and people are stuck in their homes, then online is the only place to find them. So, that’s been a really quite interesting portion. So, resistant management teams are finally saying, “Okay, we have time to do this because our other methods of reaching out customers simply aren’t working. So, that’s a big plus, I think there’s going to be a real push in some areas to do more stuff online, and therefore, to understand how it is one attracts people online and keeps people online. It isn’t the same thing when you walk down a street. Once you’ve walked into the store, you tend to spend 10 minutes there because it’s hard to visit 20 stores in a day. Online, you’re a click away from changing so people are realizing that we just simply don’t have 10 minutes to grab someone’s attention. We’ve got seconds. And that changes the way people think.

Nicolas: This crisis is THE crisis that will accelerate the transition to a more mature entrepreneurial economy or digital economy or whatever you want to call it. That’s what crises do. There’s something that’s already happening, a trend that’s headed into a certain direction, but it goes at a slow pace until a crisis happens and the crisis accelerates the pace, it fastens the pace and we’re still going in the same direction, which is a more digital economy. Some countries are seizing it as an opportunity, other countries are missing the mark, and are sliding down in terms of economic development. Like everyone interested in long-term change, I’m thrilled by the acceleration that the crisis provides. I’m terrified by the consequences of the short-term and all the people suffering and dying, but I think it creates an opportunity for every nation to accelerate the transition to a new paradigm.

Jumping S-Curves and Inventing the Future, with Bill FISCHER and Ian STEWART (#16)

Jumping S-curves and Inventing the Future with Bill FISCHER and Ian STEWART

Jumping S-Curves and Inventing the Future,

How reliable will strategy be in the future? What if tactics were more important than strategy? Are firms obsolete? What about nation states? Can the future of companies be a model for the future of countries? How is the nature of competitive advantage changing? How are we redefining quality to meet the needs of consumers and the marketplace? In this episode, Ben Robinson is in conversation with Bill Fischer and Ian Stewart from the International Institute for Management Development — IMD. Bill is Professor of Innovation Management and Ian — who you may remember from a previous episode of this podcast — he co-founded WiReD and he is Executive in Residence at IMD. 

Innovation should describe the characteristics of the way we work. It should be about how we do things, rather than what we’ve done at any particular time, or who’s doing it. — Bill Fischer

Full podcast transcript:


[00:01:51.29] Ben: We are at IMD to interview Bill Fischer, and Ian Stewart is here to make sure I get the very best out of this podcast. So, it’s going to be a joint interview and more of a conversation than anything. Starting with teams — is team a noun or is a verb?

Bill: It’s a verb. Without a doubt! Incidentally, thank you for coming over here and thank you for inviting us to be part of this. This is great fun!

Ben: I always forget to say that. So yeah, thank you for coming on the podcast!

Bill: So, I think, when we talk about innovation, the idea is, no matter what part of innovation we’re talking about, to make it a verb, not a noun. A noun describes somebody else doing it, some of the other departments, and I think that it’s too important as a quality of life — organizational life, individual life — to be pigeonholed in somebody’s group. So, I think it’s a verb. Amy Edmondson at the Harvard Business School talks about teaming rather than teams, and I think that’s a good way to begin.

Ben: And the reason you think it’s a verb, rather than a noun, is because it can never be passive — the formation of a team, the building of the team, the management of the team.

Bill: No, I think that innovation should describe the characteristics of the way we work. It should be about how we do things, rather than what we’ve done at any particular time, or who’s doing it. I think we want everybody, ideally, to think of themselves as potentially involved in the innovation process, so it shouldn’t belong to any department or group or section or what have you. I think we ought to characterize a way of working that involves curiosity, autonomy and the ability to experiment.

[00:03:45.15] Ben: I imagine Ian had the same experience that I have. You know, sometimes you have teams that just gel and they perform amazingly well; other times, you think you put together a similar composition of skills and it just doesn’t gel. So, what is the key to team performance and the composition of team, in your experience?

Bill: So, I think teams are too casually regarded. My sense is that teams should be fit for purpose. And if you think about industry development — I know we’ll talk about industry and arenas later — if you think about industry development as an S curve, then in the middle of the S curve where you know what you’re doing, and you know how to do it, then I think teams ought to be run in one way — probably harmonious and people get together and they gel quickly and they know each other. But, when you’re trying to jump from one S curve to another, when you’re trying to invent the future, then I think teams have to be very different. And I often think that contentious teams, teams that are staffed with people who know a lot of stuff and who disagree with one another, it’s probably the better way to go.

Ben: Yeah. And you take aim at what you call “polite teams.”

Bill: Right. Polite teams get polite results. Yeah.

Ben: Yeah! It’s almost like the antithesis of polite teams — teams that are combative.

Bill: Yes, but not destructive. I mean, I think they have to be led differently. I often think of teams in the middle of an S curve being led by an orchestra conductor who stands there and everybody knows what they’re doing and his or her job is to keep the movement going in the right direction and the right speed. But crossing the S curve is more like a boxing referee: allowing contentious discussion — because I want to get every brain cell I can possibly get — allowing contentious challenge to take place without being corrosive or destructive.

[00:05:55.16] Ben: You cite the research that shows there’s an inverse correlation between the size of teams and their performance, which I think, intuitively, feels great. And also, it’s unbelievable how much research went into that report that you cited. But that, then, poses the question of, if you’re going to run a large organization, how do you avoid having large teams and thinking in terms of large teams?

Bill: Yeah, so, just to be clear, the research you were talking about was a piece of work done by three fellows from Northwestern University last year — it appeared in Nature, I think, or Science.

Ben: Nature I think.

Bill: And it’s an amazing piece of research! Wonderful data, large data sets — a really spectacular piece of work. But it’s about invention, not about innovation, and I think that’s important to clarify; it’s at the very front end of the change process. For me, the thing that was so interesting in their results was that at some team size over five, every person you bring in reduces monotonically the level of novelty and the expected outcome. That’s extraordinary! I mean, the more people, the more conservative we become. In fact, they have some interesting data that argues that it’s a functional way that larger teams work, and also, the expectations that larger teams are going to deliver different results, and so people are responding to the audience as well. What clearly comes out of that is that if you have your preference, if you’re able to do it, smaller teams are better than larger teams, and they have more autonomy as well. So, I think that rule #1 about thinking about teaming is, how small can I do this, and can it be, and how autonomous can we fashion this?

Ian: Interestingly, I found the same thing on boards, with the same parallel thoughts. The less change an organization is going through — whether it’s for-profit or non-profit — the more it can afford large boards, the more it’s involved in something which requires substantial change. I’m on the board of an NGO at the moment, which is seeing its funding sources around the world radically change as governments fund less, and private sector sources, foundations, family offices are funding more in this particular area, and they have zero experience in this space. So, trying to understand how to change the fundraising process, changing actually the management team to enable them to do it has been a struggle, and what I often find on these things is that the first thing that a good chairman does is break things down to smaller groups so that there’s only three to five people handling it. So, there was a small group of us that went out to hire the new CEO, there was another small group that had to restructure how funding works. It’s a very interesting process. I think it’s exactly the same on boards as it is in innovation teams within companies.

Bill: I’ve come away over the last couple of years thinking that end-to-end responsibility, smallness, and autonomy are really critically important characteristics for teaming. Contextually, when you want to do something big, if we want to run the day-to-day operations of an activity in a mature industry, then those rules may not apply at all.

[00:09:34.29] Ben: Yeah. So, we’re going to come back to talk about whether the structure of a firm is still as relevant as it was because the very notion of a firm is building these high-transaction costs. So, we’ll come back to that. But, if the future, if optimal performance is achieved through very small teams, does that mean that organizations just become a composite of lots and lots of small teams, then? And how easy is that to actually orchestrate?

Bill: So, I have a long-term relationship with Haier — the Chinese appliance company — and that’s the direction they’re going in. They’re going in that direction because their industry is on the verge of a major upheaval around hyper-connectivity in the kitchen, and they’ve never done this before. They’ve never produced content. They used to talk to their customer typically once every 15 years; now it’s five or 10 times a day. So, they need to be really different, and what they understand, I think, is that there’s so much opportunity to do different things, but they’ve never done this before. So, what they’re doing is they are subdividing into small groups that are autonomous, that are self-investing as well, which reduces the risk to the organization as a whole, and they’re allowing people to take chances. And I think the belief is, “We’re going to be in the right place at the right time not because we’re smarter, but because we’re taking more chances — and most of the chances aren’t going to turn out well, but a couple will, and then we’ll be uniquely positioned to move forward.”

[00:11:25.17] Ben: So, I just want to drop anchor on Haier, because I’ve been to Drucker Forum and you’ve brought them there in the past, and it’s a fascinating case study, but I think there’s several things I’m interested about, one of which is, how replicable is that in other examples of companies that are doing the same thing? But the first thing is, how do they manage consistency with that level of autonomy? Because we’re talking about home appliances, so these are not things that you would want to be breaking every day. How do they manage that?

Bill: These small teams are located on platforms that are overseen by people who are more internally focused than externally focused — so the small teams are completely externally focused. But then, that behavior in activity is mediated by the role of the platform, which is sort of a bridge between the external and the internal world and does the translation. So, that, to me is the way they go about consistency. And, on that platform, they have a number of stakeholders involved, so you’re all using the same connectivity systems, so that you’re not doing one thing. One of the interesting things about this is that all of a sudden, logistics becomes a much more important player in the conversations than they did in the past, and that is because you’re no longer buying separate pieces of home appliances, but you’re applying a suite of home appliances to talk to one another. You’re spending a lot more money, and when you walk in that kitchen as a customer, you want to push the button and everything works, which means it has got to be all delivered on time as well. So I mean, you’re seeing very different internal players participating, as well as somewhat bizarre external players.

Ian: In answering the first part of your question, Ben, I think depends on the size of the organization and the dynamism of the environment in which it works. If there’s a great deal of change going on, or a great deal of change necessary and/or there’s a level of disruption because of changes in the way either the context of the business is formed or the competitors in the environment, I think that level of change requires structures and systems that allow for it. If you’re dealing with something that is relatively static — and that’s less and less true these days; all of the indications are that the lifecycle of companies is dropping — but if you’re dealing in a sector which is relatively static, then you can afford to build a deep process, which fine-tunes, which eliminates, which molds down to a point where it’s as efficient as it can be to run one set of processes. Now, something like that — and I’m thinking of large Japanese companies, for example — doesn’t react to change terribly well, isn’t able to adjust, isn’t able to innovate. But, if you’re in an industry that doesn’t have that level of disruption yet, because they probably all will at some point, then I think it’s okay to have an order type of structure. But I think it’s very clear that the trends on company lifecycles, and industry lifecycles, and the level of change that’s taking place through the application of technology in all sorts of different levels in different companies, in all parts of the value chain, suggests that some level of management, of innovation plus reliance on core processes I think, is inevitable.

[00:14:43.13] Ben: Yeah, a tension between the exploitation tap and the exploration tap, which is, as you said, depending on where you are on the S curve, which one is taking precedence. Just going back to Haier, you talked about the rising importance of logistics and the platform that underpins it. I suppose another case study is Amazon, right? We have this idea of API first, so even the internal teams interface with other internal teams through APIs, which actually makes it possible then for those internal units to be exposed to external parties — a bit like AWS was. Is that how Haier is built? Which is, you can quickly change the interface from internal to external, the same way as if you wanted to plug out a Haier appliance, you could plug in another appliance because they have to be built on a platform that allows interoperability.

Bill: I think, actually, what happens is by creating autonomous work units to the extent that they are at least responsible for their own functions, everyone has a line of sight to the customer and as a result, they take what’s going on in the marketplace much more seriously than they might have — buried under levels of bureaucracy and really don’t see the customer at all.

[00:16:09.11] Ben: I think I’ve been to the Drucker Forum twice, maybe three times, and each year, you bring Haier back to speak. They’re great! It’s a phenomenal story, and it’s so innovative in its business model. But, the fact that you bring them back and you don’t bring other examples back is that because there aren’t that many examples, still? They’re still trailblazing?

Bill: There are a fair number of organizations that are experimenting with change, but I have not yet seen any organization that’s gone as far as Haier, for as long a period of time — this is about a 35-year continuous story, with 70,000 people. And yet, there are plenty of organizations that are really experimenting in different ways with autonomy, but not on that scale, not for that long, and I think not that comprehensively.

Ian: It’d be interesting to take a closer look at Alphabet and Amazon — they’ve not been going at it for anywhere near as long. That’s the impressive thing with Hire — the longevity of the process is really quite something. But clearly, Alphabet and Amazon, in their own ways, have approached the same problem in parallel ways, trying to work out how to be continually innovative, whilst maintaining the core business and trying to build a set of internal processes that keep it feeling and acting and operating as a single entity, a single corporation whilst creating these new services and businesses. I mean, it’s a fun area! It’s a really, really fun area! My favorite bit of business at the moment is this frontier between trying to run something and trying to build something because they’re not always the same thing.

Bill: And the boundaries between these organizations blur because, where’s your focus and where’s your allegiance and where’s the center of activity occurring? And that’s interesting. The other thing that I have always been fascinated by, at Haier, and it’s probably because I had gotten to know the chairman Zhang Ruimin so well, but he talks a lot about giving up control — not amassing control, but giving up control — because that’s the only way the organization can move responsibly fast enough; that’s interesting, to watch an organization trust its people to get on with their job.

[00:18:35.04] Ben: In terms of lessons learned, one of the fascinating things is, home appliances, this is quite a capital intensive business, and so, I can get how you can devolve down autonomy for decision-making because you want the individual units to be quite responsive to changing customer demands, but how do you devolve down capital allocation on that scale?

Bill: That’s a big problem! And it means, probably — and I’m watching some organizations try to deal with that — it means that the sizes of these organizations are arguably going to be much larger than the small groups that are interacting on the frontier of client-facing type. But it doesn’t mean you can’t do it, it doesn’t mean that a group of people can’t run a large-asset, intensive operation within a manufacturing framework or run the manufacturing framework itself. I mean, that can be done — it’s a different size, and it’s a different degree of involvement engagement.

Ian: I think it’s also a different approach to risk. If one’s trying to allocate capital in areas that are less well-known by the existing management team… I mean, I spend my time these days often going backwards and forwards between French organizations and American organizations or whether they’re Canadian or US, and there’s a very different approach to a decision about whether to invest in either a process or a new technology. The French companies — and forgive me for French listeners, if I’m generalizing to a point that is offensive — French companies tend to go more into the reports, and details, and they want to be absolutely certain if they possibly can before they make the decision. The American companies want to be sure or more or less triangulate that this is the direction, and then they’ll throw money and people at it and see what happens. And I think that that different approach, the ability to take on investments with higher risk and less certainty, I think is fundamental to very large organizations being able to allocate capital to their internal operation. So, I’ve spent time, obviously, as an investor, as a venture capitalist, and I think that some of those attitudes, some of those approaches to being comfortable with risk and trying to judge what are the levels of risk you’re willing to accept — is it more the team? Is it more the tech? Is it more the goal? Are the processes involved appropriate, given whatever the context is for what they’re trying to do? And then deciding, “Okay, $150 million goes on this” based on less information than some companies might be willing to accept. I think that’s essential for this type of change at this type of scale in large organizations trying to stay relevant.

[00:21:13.06] Ben: So is that what will determine the winners in the future? Which is, if we think about the changing nature of competitive advantage, is that ability to deploy capital better and faster or will they be disrupted by companies that are more modular and more networked?

Bill: So here we get into the difference between industries and arenas.

Ben: Yes.

Bill: As a preface, I would say, if you reflect on the way we think about strategic thinking, it’s based on industry analysis — Michael Porter’s five forces, and things like that. Industries are asset-defined. So, all automobile companies pretty much look alike and all banks pretty much look alike and they all have the same assets and the same talent, but there’s a couple of things going on now, I think, that are really changing that. One is that we’re no longer as interested in the asset-defined rivalries as we are in the outcomes, the customer experience. So, for 100 years, when we think about strategy, we’ve been thinking about the inputs. And now, we’re thinking more about the outputs. I think that’s a function of a business model innovation, and the ability of a whole generation of entrepreneurs who have decided that they don’t have to have those assets, they don’t have to have those engineers; they can go out and play in the customer experience game and access the assets and talent that they need some other way. And they’ll differentiate themselves on something within the business model that everybody’s been aware of, for a long time, but nobody else has taken on. And so, I think that the nature of the way we categorize firms is changing.

[00:23:08.29] Ben: And so, is the right way to categorize firms as aggregators, and platforms, and long-tail, then? Is that the way to think about it? So they’re either aggregating the work of other companies and their consumer-facing, or they’re sharing network effects across their platform where they’re not necessarily customer-facing, but they are sharing between all the different tenants of the platform, or are they the long-tail suppliers to the platform?

Bill: So, we start outside-in rather than inside-out, and we start with the customer experience, and then, we think about all of the different ways that we can affect that customer experience or change the customer experience. At the present time — and I don’t know if this is because it’s in the middle or at the beginning of this transition or it’ll always be this way — there are still some assets-specific providers who do everything and well-known brands who are participating in the arenas — as Rita McGrath calls it — that characterize the creation of customer experience, but there are also some aggregators and some modular assemblers. I guess those would be aggregators who are doing the same thing with a completely different balance sheet in terms of the way in which they go to market. While I’m saying this, I’m thinking that we’ve seen modularization around for a long time. It’s not new. The missing piece, I think, has been the business model, which has really tied it together. So, Alex Osterwalder who lives just a short distance from here, really deserves a lot of credit for reminding us, calling our attention on the fact that the business model is really an important way to think about innovation, and we lost sight of that somewhere along the line, I think.

Ben: Yeah, I think the business model is the most important thing to get right. We’ll come in a second to the discussion of strategy versus innovation, but I think business model trumps both because if you get the business model right, then it allows you to innovate at scale and it allows you to execute the strategy. So, I would argue, the business model is now more important than ever has been.

Ian: I think it also depends on where you are in the value chain for an industry — or an arena, for that matter — and where your skills and competitive advantage lie. Even in the car industry, where you have a whole bunch of people facing the customer on the B2C side, with variations on a number of different themes — with SUVs dominating these days — at the back end, you’ve still got a very limited number of suppliers of, for example, gearboxes, where a few companies really dominate. They do one thing really, really well, then they customize it to the different customers, but, essentially, there are very few companies supplying to a great many B2C-facing car companies and car brands. So, I think it depends a little bit on where you are and where you sit in the system.

Ian: I wanted to address another question you asked very early on about whether Haier and its development of platforms facilitates interoperability. I think there’s a big difference between the platforms that a company creates for itself, for its own innovation, and for its range of products and services. Bill mentioned if you start to buy from a company which has its own system — and of course, we know Apple in the space, not with washing machines, but yes, with consumer objects — it becomes very hard to leave after a while because the system works very well in amongst the different objects and tools and machines that they sell. The same will be true, I’m sure, at Haier, but I’m sure, as with Apple — I’d love to hear from Bill about this — Haier probably doesn’t make great efforts to ensure that their systems interoperate with other competitors in the Chinese marketplace, because that’s a source of competitive advantage. So we see certain benefits of network effect within ecosystems that we control. We don’t necessarily want other people’s devices to be able to interoperate because then we lose our control of the customer. So I think it’s interesting to see what’s happening, and I think there are efforts to create standards to allow IoT systems to interoperate — it’ll be very interesting from a competitive landscape point of view to see how that goes.

Bill: Yeah, I agree. I was trying to think about how that would work, and my sense is that, certainly, Haier does have its own system of connectivity and within the domestic Chinese market, that’s the one that is in use and I think has been probably the market leader. Outside of the Chinese system, the reality is that you have other organizations like Amazon, Google, and Apple who have a head start with their systems — particularly Amazon Echo and the like, because they’ve been around for a longer time. So, I think it would behoove Haier moving into the domestic North American market to make sure that their equipment works with the standards — how many of these devices do I want to talk to so that they’re a system? What I don’t know, and an interesting question is, would they have a special microenterprise that would take responsibility for that system, or would the existing microenterprise adapt to fit both systems? I don’t know how that works and I don’t know who would make that choice. I think the way the choice will be made is who moves the fastest within Haier?

[00:29:04.20] Ben: I’m really pleased that you raised this, so I think it’s worth delving into this a bit more. Isn’t that notion of switching costs — which is really what you’re talking about, which is, you make things proprietary so that it’s difficult for your suppliers, your customers to switch up — isn’t that a very Industrial Age concept that will gradually disappear? Because the nature of competitive advantage is changing. I mean, you’ve said everything has to be customer-first, ecosystem first, such that the most successful companies will be those that generate the highest level of network effects and those that externalize those network effects with their ecosystem, such that the idea of introducing heavy switching costs is almost the antithesis of how you increasingly create and sustain competitive advantage?

Bill: If I can just make a quick observation: I used to do a lot of work in the telecom industry, and I remember how major telecom companies would be afraid to become the dumb pipe. Nobody wanted to be the dumb pipe. I now hear automobile companies say that because in autonomous drive vehicles, if the audio connectivity is done through an existing system like Amazon or like Google or whoever, then who actually owns the customer? And if I have an Amazon Echo on in my home, and I then go out into my garage, do I really want to change systems? And how interoperable do I want to be? So, it’s not in Amazon’s interest to make it easier for anybody.

[00:30:46.05] Ben: But, in a way, isn’t that Canute-like to resist that? Because, almost necessarily, we’ll prefer some channels to other channels, and we won’t want to have different proprietary channels for our car, for our bank, so we’ll probably necessarily move to horizontal channels. Isn’t the trick to make yourself desirable even if you don’t interface directly to the customer — i.e. to be the car that people choose even though they might interface through Echo, the bank that people might choose even though they might interface through WhatsApp?

Ian: I think that’s the crux of a competitive question. If you think that there is going to be the potential for a horizontal network effect, integrated system across multiple brands, then you target that. But, if you think you’re going to add enough value — remember, it’s not about optimum value, it’s about enough value — to your customers to keep them loyal and keep them within your system as much as possible, then the rent you can charge for that, the amount of margin you can generate from that is going to be enough to sustain you for a great many years, even if ultimately you think you’re going to get knocked out, as you say, “Canute against the waves.” I’m not sure. I think this is a classic problem that every company in every industry faces at some point, open or shut, and I don’t think it’s a given that everything’s going to be open. I really don’t.

Bill: So, it’s an interesting exercise of legacy thinking: what’s legacy thinking and what isn’t? And it also calls into question the enduring power of brands. Is there enduring power of brands, or will brands fade, in what Charles Fine would call “fast clock speed industries” where there’s a lot of turnover? Brands that have prospered in slow-change industries would they also prosper in fast? Can you make them do that? And if you can’t, then how fast you move to get out of that constraint? I think those are really interesting questions. So, the way I see platforms working is, if I’m doing a proprietary system that allows my products to be connected, whether they’re home appliances or not, do I encourage another internal microenterprise to try to do ones with a broader set of connectivity — maybe common standards, among others — and see how the market reacts?

[00:33:24.04] Ben: But I think what’s interesting about Haier, is they’ve built an organizational business model, let’s call it that, that allows for very fast innovation. So, arguably, that’s a business model where they can keep up with changing customer expectations. But most companies can’t; I guess they need to insource innovation from other people. And so, I don’t know if Haier can innovate fast enough, particularly as it expands into a larger arena. But, isn’t that the question: How your need for the work of others depends on how fast your own market moves? And, to talk about something else that you mentioned, you think this is sort of the New Age of Edison. Are there slow-moving industries anymore? I mean, you could argue that electricity was a slow-moving industry, but that’s undergoing massive change, right? So, what is a slow moving-industry and can anybody afford not to adopt an ecosystem model?

Bill: So, I think there are industries that wish they were slow. But my sense is, if you say there are no slow-moving industries anymore — which I don’t think we’re there yet, but I think we’re in the not-too-distant future — and we’re moving into unknown areas of rivalry where we have broad arenas with many different types of approaches, I think that strategy no longer becomes reliable, dependable.

Ben: Not enough time!

Bill: And that strategy becomes the ex-post rationalization of successful or unsuccessful tactics.

Ian: As it sometimes already is.

Ben: Every successful entrepreneur post rationalizes the story of the firm and the fact that everything was pre-planned and not down to luck.

Ian: And every country writes its own history. You’d only have to compare the English, the British, and the Chinese histories of certain parts of Southeast Asia to see.

Bill: What if we managed as if tactics were more important than strategy? I think that, in a sense, we’re doing that.

Ian: I agree.

Bill: I think Haier certainly uses it. And I think that changes the way in which we approach things. To go back to teaming, if we take a look at the last hundred years of industrial history, most organizations, and most generations of managers have remained on the same S curve. And now, all of a sudden, we have this acceleration of change. For me, the most important piece of that is that the ruptures between S curves become a larger part of my managerial career — and in those ruptures, I have to act differently. So, if I move quickly from a world where strategy was worthwhile because I had a long expectation of harvesting that strategy, to a point where I have to continually move from one S curve to another, I think I need to act differently. And every one of those S curves is the unknown, it’s no longer the uncertain, right? Strategy is the province of the uncertain. We sort of know the way the game is played, we know who our customers are, we know who our rivals are, we know how to do this. But if I’m going into the unknown, if I’m going to brand new industries and brand new customer experiences, then all that decision-making becomes unreliable.

Ben: Yeah.

Ian: There’s not much point in having a three-year or five-year strategy plan if you have to adjust it every 18 or 12 months.

Bill: Right!

Ben: Or three months.

Bill: Yeah. I had dinner a couple of years ago with Tim Brown from IDEO, and he said one of the things that is changing in his business — which is the design business — is that they’re losing the middle of projects. So, they have beginnings and ends but there’s less and less time in the middle to do things because of customer pressure and time to market. That changes the way in which you do everything about a project.

[00:37:32.10] Ben: So, taking that same idea of losing the middle, is that now what’s happening to strategy, which is bifurcating between, on the one hand, setting the company vision and mission and trying to manage the company culture, to put in place the right business model — which is just stuff that doesn’t change very often — versus the polar opposite, which is, the rest of the strategy is introducing as few constraints as possible and allowing the company to be as innovative as possible?

Bill: Oh, yes! So, my view is that change is continuous and accelerating, but in corporate life, organizational life, is episodic and remains episodic — so they’re always going to be out of sync. The problem is, how do we speed up the nature of organizational life, so that it’s more in tune with the change in the outside world? And this is not unique. Another lesson from Haier is we have to resist linearity and sequentiality in the way in which we work.

Ian: This is a parenthesis, which takes us out to a different field, but I would argue the same is true for country governance as it is for corporate governance. I think a country like China, that still does five-year plans, struggles when things change very, very quickly in large ways.

[00:38:57.19] Ben: How repeatable a process can innovation be? I mean, you wrote a book called “Idea Hunter”.

Bill: It’s a great book!

Ben: It’s a great book and it cannot be simplified in a simple line, but this idea that there is a formula for continually coming up with good ideas, which by extension means that the same company or the same individual could continue to be innovative.

[00:39:46.25] Bill: Right! Design Thinking, Lean startup — things of this nature — are procedural, and I think what they are is procedural in a way that reduces the linearity in the innovation process. So, the old innovation funnel, right? The old innovation funnel was completely inside out — it was all about our numbers rather than the customer experience. It was completely inside out, was completely linear in the way in which the stage-gating processes worked. And, for me, the biggest cost was that learning took place at the end. And what I think we’re doing with Lean Startup and Design Thinking, and the variants thereof, is we’re trying to move to a slightly less linear process where we do more testing along the way, pretotyping, prototyping, and so, the learning is moved forward. We don’t have to wait until the end of the experiment. So, my sense is that, in the face of increased unknowns — which is the shorter S curves, more ruptures between — we are moving to a more experimental model of decision-making, and that experimental model involves much more testing, faster testing, and quicker learning — and then, the application of that, as we go along, but it’s still a process.

[00:41:08.00] Ben: Recently, we interviewed Marc Gruber, for the podcast, and his argument is that the toolset that you’re referring to — Design Thinking, Lean startup — is missing one tool, which is the where-to-play framework. Do you also agree that it’s really important, ex-ante, to decide where you’re going to play?

Bill: So I think prototyping is, can we do pretotyping? Does anyone care if we do it?

Ben: What’s that term?

Bill: Pretotype. It’s the minimal viable representation of the idea tested in a marketplace. So, it’s an attempt to try to see if anyone cares about this and, in a sense, that’s some insights into whether or not there’s a market for this, whether we should be playing in this space. And the beauty of pretotyping or prototyping is that it gives you better feedback because you’re talking about something tangible, rather than something abstract. So, my sense is that all of these things, moving from abstraction to tangibility — quick testing and all that — are attempts to reduce the impact of legacy, linearity, and sequentiality.

Ian: I have this worry sometimes, as we lose the middle, as we’re constantly working on customer value innovation, and we’re constantly trying to catch up with production to meet those new expectations of our customers, whether that lack of middle and lack of longevity of process reduces quality and reduces the longevity of the product and the service.

[00:42:55.20] Ben: There is a clear trend in place where customers don’t want mass-produced products; they want things that are more locally-sourced, higher quality. Almost like the end of the end-consumer brings with it the end of the mass-produced customers.

Bill: I don’t see any reason inherent in that process where quality should be reduced. It’s not as if we’re doing it in a half-baked fashion. We’re still trying to build the right quality but the interesting thing that comes out of this is that, what if the customer decides the quality is not an important issue in their purchase decision? What if, in fact, the quality that we’re producing is unnecessary?

Ian: The best example is in fashion. Fast-fashion over the last 15 years, people have been happy to have things that fall apart in three months because then they get something new because it costs them nothing.

Bill: Yes! Yes! Actually, I spoke with a firm that makes fast-fashion and whose largest market is in the city, in London, because they have wealthy, well-paid typically men who have no domestic skills, who buy a shirt once and throw it away, because it’s so affordable. So, I think that we have a definition of quality, a legacy definition of quality that needs to be re-examined. Listen, I’m not advocating bad quality.

Ben: Fast throwing away shirts after single-use.

Bill: What I am advocating is rethinking the nature of quality and what’s required. We see a movement away from long-term — particularly in North America — two-year MBA programs to shorter MBA programs. Is that a reduction in quality? We don’t think so. We think that we’re redefining the nature of this experience, in many ways. And you see a growing rise in certificate programs. I think that quality, like anything else, is constantly up for redefinition.

[00:45:17.15] Ben: I’m so pleased you brought up the topic of MBAs because, in a world where innovation matters more than strategy and where experimentation matters more than knowledge, is it worth people taking two years of their life to study in a classroom?

Bill: I don’t know what the right time period is, but I’m a great believer that knowing more is better than knowing less.

Ian: It makes sense to me.

Ben: Even if you continually write in your articles that the experimentation trumps knowledge?

Ian: Experimentation also leads to knowledge.

Ben: Touché!

Bill: Yes! So, last year, I took 95 MBAs to Shenzhen — a colleague and I did — and it was a great experience! We spent five days there. It was about learning, not knowing. So, I think more and more of education is about how do you engender the curiosity to seek things out? And then, how do you learn? What do you do to learn more? Because going back to the rapidity of change in the S curves, in the future, what you know will be less valuable than how you learn.

[00:46:35.22] Ben: And is that what you are increasingly teaching that — how to learn?

Bill: Yes, I think so. I think what we’re providing is frameworks and vocabularies that make it easier to learn and make it easier to share learning — scalable learning — but I think that more and more those frameworks have change at the center, rather than stability at the center.

[00:47:00.02] Ben: So, I’m looking around at your bookshelf here. We’re in Bill’s office, and as you can imagine, you would expect of a professor’s office to be full of books. I’m just trying to count how many of these books have the word “firm” in them. And my question to you is, is the firm still a relevant concept or is it obsolete? Because the firm was all about grouping people under one entity because transaction costs were high and because it was about systemizing production — so you needed to organize work into repeatable tasks, with formal hierarchies — and everything we’ve talked about so far suggests that every notion I just mentioned there, is obsolete. So, is the firm obsolete?

Bill: That’s a good question!

Ben: You’re going to have to throw many books if it is.

Bill: I think in the spirit of how we started this conversation, organizing is not obsolete. Teaming is not obsolete. The construct of a firm may, in fact, need to be re-examined. Earlier you talked about how we think about organizational size and how that’s changing, and I think that’s really true — and that’s probably true in the nature of the firm as well: the motivation for the firm, the corporate nature that tends to be associated instinctively with the firm. All of those things probably need to be rethought and redefined and re-examined, questioned, but I’m not sure that organizing itself is a bad idea.

[00:48:37.01] Ben: So, we’ve nearly got to the point where we delved into the Chinese question — we’ve constantly held ourselves back, but I think we’re ready now. But maybe let’s start through the prism of the idea of the nation state, which is, if the firm needs radical overhaul, does the nation state require the same?

Bill: Ian?

Ian: So, I guess, referring back to my earlier comment about the difficulty of having five-year plans in a world that changes every three to 12 months, I think the general answer is yes, to a degree. I think a lot of the things that still glue people together — culture, attitude, and history — remain and will remain important. I think what’s interesting, today, is that the nature of citizens’ relationship to their country is changing, and it depends on where they are. I’ve said in public before that I think that the relationship between capital cities of a lot of the world, certainly Western nations, but including places like Beijing and Tokyo, less so Jakarta, bear more resemblance to each other. These places bear more resemblance to each other often than they do to their own hinterlands, and I think, therefore, that the term nation state is interesting because I think there’s a difference between how large capital cities, large busy cities, whether they’re officially the capital or not, are very, very different to the countryside from whence they came. You only have to look at the Swiss referendums to see how different the voting is between cantons in the center of the country and the cantons that touch the outside world. But also, if you look at the voting for Brexit, if you look at the voting for many major cultural and/or country changes over the last 10 years — I think of the US, as well as the UK, but also Venezuela and Brazil, and elsewhere — we have a dichotomy taking place. We have a dichotomy appearing very strongly between big cities and the rest of the country. So, I think that’s one dynamics which requires change in governance with the countries concerned, but it’s also about the relations between countries across the board. I haven’t been for a long time a big fan of things like the United Nations, but the purpose of the original League of Nations made sense. I wonder now, within the context of the changes that are taking place inside countries, whether we need better relationships across countries.

[00:51:00.00] Ben: If Haier is the future of the firm — large autonomous independent units that are brought together through logistics and data — is that the future of countries? Because, in some ways, in Switzerland, the model for a modern country because that’s really what Switzerland seems to do quite well, which is this thin federal layer that kind of coordinates activities, and then a lot of power and responsibility and autonomy devolve down to communes — and if that’s the case, it would seem we’re moving in the opposite direction: states become more insular and I don’t know. That’s just as a thought. If the Haier corporate model is the model for nation states, how does that play out on a global scale?

Bill: You know, it’s hard for me to answer this question. When I was much younger, I thought that the nation state would fade and that multinational corporations would become — I mean that was 100 years ago — multinational corporations would become the real powers that move the world, but they failed. They failed because of inefficiency, they failed because of greed, they failed, because they did not take the interests of everyone into account.

Ian: I wonder if it’s changing with a move to stakeholder focus rather than shareholder but yes, I agree with you.

Bill: Great! And I certainly don’t see any change coming out of Silicon Valley with these new-age sorts of organizations. The biggest problem I think that we have, in so many countries, is the income disparity that exists and the inability for some people to have futures. So, what I do think is interesting in the example of Haier, is that, first of all, they trust the people — and I think Switzerland does that as well with the way in which the voting takes place on everything. So, there’s a great deal of trust in people to be effective participants in a political process, and there’s a very clear focus on what they want to achieve. And there’s been 35 years of consistent trust in the workforce and a belief in the talent of the people there. I think that over time, what that’s done is that has led to the ability of people to advance their own situations. People who normally would have been in a traditional organization, would have been on the margins of society because they lacked the educational credentials or because they lacked the connections. The ability to be autonomous and to start things on a small investment has allowed smart, hardworking people to succeed. So that’s a good outcome.

Ian: I’m generally a great believer in the notion that smaller is better for structures, not just in times of innovation, but also because of the nature of the way people treat each other in small structures versus big structures. I think smaller structures are healthier in interpersonal relationships, whether they’re in organizations or societies. I’m going to take a twist on your question, Ben. I am not sure that there is an optimum model visible yet for country governance because I think it’s context-related. In the same way, I think that the optimal model for company governance is also context-related partly speed, partly size, partly environment. I think I’m going to twist it and say that my faith, both looking at history and looking around me — but I’m slightly biased in this because as someone who starts companies, I believe in the power of the individual — I’m going to say that I think it depends a great deal on leadership. Just because one country has a leader that people are unhappy with, it doesn’t mean the structure of the country or the systems within it are wrong.

Ian: Similarly, I think because a country is successful, I think one has to look terribly closely at who’s driving the success currently, to understand whether it’s the individuals that are within that structure that are making something unwieldy work, or is it the structure itself, which is predisposed towards producing good leadership and therefore good results. I’m more a believer in good leadership, whether it’s corporate environments or in-country governance, than I am in the structures because I’ve seen bad structures work and I’ve seen good structures fail, both in corporates and in countries. So, I care a great deal about leadership. One of the reasons I spend so much time at the school, one of the reasons that I like coming back here and something I very much enjoyed about my time when I was here was, it’s about leadership, it’s about creating good, global, citizen leaders. I think that’s crucial. I think I wouldn’t put my faith in structures; I would put my faith in individuals.

Bill: I agree with that. I think that we need to look at the role of people to be able to play a leadership role, not only at the top of the organization but throughout the organization. And my sense is that when we work with organizations who aspire to be like Haier, one of the problems we run into almost always is that they’re unprepared to give autonomy to their people, and the people are unprepared to accept the autonomy if it’s given to them — and that’s largely because the perception is that leadership doesn’t take place throughout the organization. And I think what I’ve learned from Zhang Ruimin is he says, “We’re an organization of leaders.” These people are all running small businesses, some of which are not so small, many of which are quite successful, and that needs to be reinforced. And then, I go back to the IDEO example, and one of the things Dave Kelly used to say was his job as CEO, as the leader, was to reinforce the confidence of the people in the organization to make the right decisions.

Ian: But I think you’re also reinforcing my point about the fact that if you don’t have a leader like that, it’s not going to happen in the organization.

Bill: That’s right!

Ian: It is important for the leader to be aware that they need leadership at all levels of the organization.

Bill: So, if we go back to the broader innovation question, for me, I’m a big believer in top-down leadership. Not dictatorial, not oppressive, but if you don’t have strong top-down leaders, then you cannot allow bottom-up to occur because the leaders become intimidated or threatened by the suggestions. So, you need people at the top who are secure in their own confidence and who are enthusiasts for autonomy. And so, that’s going to determine how organization boundaries get set and how they operate.

[00:58:24.28] Ben: Is that how you would define the leadership in China?

Bill: Well, that’s a very different level of complexity. It’s a political leadership. I don’t think that’s the role of political leadership in any country that I know of.

Ben: But leadership at a country level is just as important, isn’t it?

Bill: Oh, yeah, I think so, too.

Ian: I think Bill’s referring to the systems underneath. The complexity of politics in any country is such that you can’t necessarily assume that everybody is united on a particular goal or vision because there are many visions and many goals — you have competing parties, you have competing people within parties, you have systems within the systems, you have autonomous bits that fight with each other. It’s not so easy.

Ben: This is what business people that become politicians always underestimate, isn’t it?

Bill: Yeah, right.

Ian: Absolutely! I think there are certain types of people who run businesses, who have the capacity for this openness and this ability to deal with complexity underneath them that might survive in that environment. But it was the reason why not to have generals running countries, too. If you’re used to a certain type of hierarchy and an assumption about how the orders would flow down and follow what was required by the top, then that doesn’t work in almost any political system that I’m aware of.

[00:59:47.15] Ben: Other than the fact that you both work at IMD, another thing that unites you both is that you lived for a long period in China and you witnessed the economic miracle that has taken place over the last 30–40 years. Is the economic miracle stalling? And if so, why?

Bill: So, I think there are some structural issues that everybody has known about for a long time — it starts with the demographics of the country. You have an aging population. I think that that’s not going to go away in the short run. I also think that you have an economy that was built originally — the modern economy — starting in 1979–1980, built with an export orientation. It’s harder to build a domestic market. It takes more time and the like, than anyone thought. It’s happening now, but it’s been a while. And the other thing is, if you build an export-oriented economy, you sort of hope that your customers are going to grow — and the rest of the world is not growing either. So, I think that there are important what I would call, structural and demographic reasons for the present slump.

Ian: To add to that, there’s also a natural cycle. They’ve gone through an extraordinary expansion with all the funding coming in from overseas and the growth in population and the extraordinary improvements internally to allow both. I’m not going to say the defeat of poverty, but there was a huge reduction in the number of people surviving on very little. So, I think the governance of the country is in a place that’s so large and so complex — it has been really quite extraordinary over many years — but we’re now at a cycle stage in their own cycle, where there are other things to be sorted out — a slightly less capital available, there are concerns overseas in terms of how the country is perceived. Internally, there are questions about the way the country is governed, the way that certain decisions are made, which partly happens when things slow down and there isn’t this sense that everybody can do fine and it doesn’t matter what the government’s doing, because we’re all going to be better off than we were before. I think all of these things lead to a natural slowdown. I don’t think it’s something I would worry about from a global perspective. There is the issue of the internal debt problem and the possibility that the non-performing loans in some of the larger regional banks are never actually going to be paid back because the developments have been made. But I think those are structural issues, which again, people are aware of, both in China and abroad.

Bill: And it is not the first time.

Ian: And it’s not the first time. And actually, if you look at history, their history is a lot better than, say, Argentina, so I’m not worried yet about China.

Bill: I first moved to China in 1980, I’ve been there every year since. If you look at China through that period of time, what has happened today would have been unimaginable in 1980. Absolutely unimaginable!

Ben: Quite extraordinary!

Bill: Right! And so, I think one of the great headlines of the late 20th century, early 21st century, but certainly late 20th century was the movement of China, the development of China into a modern nation state. And modern nation state, I don’t think it could have happened if it was just individual provinces working in an autonomous fashion. So, I think they needed that galvanizing force. Since the onset of the One-Child Family Policy in 1980, you could forecast that there was going to be a plateauing of growth in the economy, due to the reduction of people consuming and producing age. We’re there now. I have also learned never to underestimate what the Chinese people can do, and my sense is that China will come out of this fine, I think. I would not short China in any point.

[01:03:45.24] Ben: Do you think China is ready to overtake the US?

Bill: I don’t think that’s important. First of all, what numbers are we going to use? We could argue it forever. I think the fact is that China has modernized to a point where it’s a global, geopolitical, economic, technological power. And I think that’s the accomplishment.

[01:04:04.27] Ben: But in a way, the US — and you could argue whether this is a trend that will be sustained — right now is becoming more insular. It’s not rejected globalization, but is retreating from international organizations, they’re retreating from globalization. Does that mean that China steps in and becomes a global superpower? Because you said, it doesn’t matter. But if that mattered.

Bill: I think China is a global superpower.

Ben: Preeminent. Voilà!

Ian: Again, it depends on what preeminent means.

Bill: Yeah.

Ian: Hearts and minds versus economy and dollars, I think are very different things.

Ben: Yeah. China is much more interested in the latter, right? The Belt and Road Initiative is about creating markets for exports.

Ian: There’s also a sense of history in the Belt and Road Initiative. There are different things going on there. And again, I don’t think either of us is here, ready to speak for China, but what we can see is a concern at different levels of government for how the company is viewed — even though they pretend it’s not so important — how it builds its own systems internally, how it helps its own people, and logically, so given how recent and massive the changes have been, it’s obviously more concern with ensuring that things are fine within China than without. And so, I haven’t seen any politician attempting to create a global leader role, either as a politician or for the country, because there’s always been this sense that we worry about our problems, we don’t interfere with other people’s problems, we don’t want other people to interfere with our problems. I don’t think there is this wish to have this role of leading global adjudicator over other people’s issues. Yes, perhaps the US did play that role for a while, and yes, elements of US society wish to be less involved in other people’s issues for a while, but I think Bill’s right, I think it’s the wrong question. I think what’s interesting now is to try and work out what the new world looks like with a few large stakeholders, a few smaller stakeholders, and very different ways of measuring impact and influence in the world today, partly because of the difference between network effect and military effect and partly because it is about ideas and concepts as much as it is about the ability to control a seaway.

Bill: I think we’d all be better off if the US and China were in an amicable relationship. Everyone would benefit as a result of that. At the present time, fear is an insidious, corrosive power.

Ian: Often used by politicians.

Bill: Yeah. Often used by politicians and at the moment, at least, in North America, in the US, it’s on the rise. Actually, if you look at the US, the US has never really been a whole-hearted embracer of a global community except for the period between the First World War and recently, so it’s a return, I think, to some of the inherent conservatism of people in the center of the country who are not as cosmopolitan as they probably should be.

[01:07:32.08] Ben: And where does that leave Europe? So, if the Belt and Road Initiative is about creating a stronger economic alliance in Asia, in Africa, United States is a large domestic market and they’re happy to subsist with being themselves and they don’t have somebody difficult neighboring countries to deal with and they’ve got a large domestic market, where does that leave Europe? Where is Europe set in this two-polar world?

Bill: So, I’ve always been enthusiastic about Europe playing a larger role in the world than it is at present. I would like it to be more relevant. I think that it has historically been a source of values and reflection that the other two great powers have not been interested in. But I worry about Europe playing that role because I don’t know where Europe is any longer and I don’t know where it stands. It seems to be perpetually stuck between aspiring to be a great power and not being able to execute.

Ian: One of the strengths of Europe is exactly what causes that issue. It’s not one country, it’s not a superpower, it’s not a nation state, per se. I think it’s one of the charms and values of Europe. I think one of the things that’s great about this part of the world is the multitude of languages, approaches, cultures, and ways of thinking and doing things. I think that’s what creates the richness of Europe, and the richness of the experience of being here. Now, it does make it difficult to make a decision in one place, and it does make it difficult to have a European viewpoint. I’m not 100% sure the world needs it. I like the fact that every now and then you do get a European point of view because there are certain things that many of certainly the Western European states, sometimes less so the Central European states agree on. I think I quite like the variety of discussions that take place about any points that are in Europe. I like that diversity of opinion — I think it’s what is the charm of Europe. I also think that being smaller makes it easy to manage, if you think of the Haier model, this multitude of different approaches to problem-solving and different products that occur.

[01:09:58.16] Ben: Doesn’t that require a thin federal layer? Which is kind of developing as we speak.

Ian: We kind of have a thin federal layer. The question is how thin it gets? I think there are structural issues. There’s the obvious structural issue of having a united currency and a disunited fiscal system. So, I think there are lots of things about Europe that don’t make sense, in the way it’s structured. And also, there are different goals from different European leaders, and it changes when the leaders change, about what Europe should be. The vision from the 1950s was relatively loose. The vision from some, now, macro-leaders amongst them is the United States of Europe, and not everybody shares that view — some of the newer members, even less than some of the older members. So, I think there are structural issues that make it very unlikely that Europe becomes this single voice, single cultural place that some people would like, but I don’t think that’s a bad thing. I quite like the diversity.

[01:10:51.05 Ben: But the problem with Europe, I guess, is, in the absence of having these new Digital Age giant businesses, it’s a risk of becoming a tourist destination for Chinese people over time?

Ian: It is a tourist destination for Chinese people.

Ben: But that is being the only engine of growth.

Bill: Incidentally, I think that’s not a bad thing because I think that we all…

Ben: It’s not that is a bad thing, but it’s difficult to find nations that rely solely on tourism that are really prosperous.

Bill: I think one of the things we talked about needing to expose people in the center of America with what’s going on in the world around them. We also need to expose people in every country to what’s going on around them.

Ian: Yeah. Everybody should travel!

Bill: And I think that the fact that we have a lot of tourists coming from China today is a victory. It’s a huge achievement! You would never have thought of that when the reforms began, so it’s a sign of success. I think that Europe plays or could play an important role in moderating the excesses of the other superpowers, and I think that that would be a healthy outcome, in particular at the moment with what’s going on in the US. I think that there needs to be a broader view of how we work together.

[01:12:20.10] Ben: So, I’m going to attempt badly to summarize some of the things we’ve talked about. So, team size matters — smaller teams, in general, perform better than larger teams for many reasons under certain contexts. Definitely, the nature of competition is changing much more to arenas than industries; innovation is rising in importance vis-a-vis strategy, and innovation can be a repeatable process. Business models matter so much more than they did in the past. China is at a point where it’s slowing down, but, as you said, you can never underestimate it and it will necessarily start to exercise greater geopolitical influence. My last question to you, both, is that I think you could argue that we’re at a point in history, which is almost like pre-reformation. I mean, China is almost the equivalent of the discovery of the New World; as a symptom, you’ve got massive change in information flow with the internet and so on. I want you to be bullish for a second and say, what’s positive with the world change from this point on? Starting with you, Ian.

Ian: I’m generally very optimistic. I’m generally very positive. I said, on the previous podcast, that it’s not technologies that create problems; it’s the people who use them and the way they use them. I refuse to be a new Luddite and say that we live in a world where all of these things are scary. I wish Elon Musk wouldn’t keep saying that AI is going to harm us all. I think because of our ability to see more, know more, understand more, I’m totally in agreement with Bill that knowledge is helpful and that experimentation leads to more knowledge. We simply are better able and better equipped than we ever have been to understand complexity and come up with solutions for it. And so, even if individual leadership or geopolitical regional issues or changes in demographics create challenges for both countries and the world as a whole for the next 20 to 50 years, I am totally a believer that we now are better equipped than ever before to face those challenges and come up with solutions. I’m very excited to see what happens. My daughters are now at an age where they’re entering the sphere at 26 and 28 — one is in private equity and one is running her own company — and I love the way they talk and think about the world, and I’m really looking forward to seeing what that generation comes up with. So I am absolutely an optimist.

Bill: I think we’re on the eve of an age where there’s technological revolution, a series of technological revolutions that will change everything — change the way we live, change the way we interact. The level of change will be unprecedented, both because of connectivity and hypermobility and also the genomics revolution. All these things taking place at the same time, I think will provide the potential for huge landscape change. But, what I would hope is that our organizations are up to the challenge and that leadership is able to recognize the opportunities and move fast enough — and this is why the teaming issues that we talked about are so important. And I think that we have to provide opportunities for our entire population, not just the winners of the past economic era. And if we can do that, I think we’ll have unprecedented success. So, I’m bullish.

Ben: Ian, Bill — thank you very much for coming on the podcast!

Bill: Our pleasure! Thank you!

Ian: Thank you for having us!

Smart Focus or Pivot Later?, with Marc GRUBER (#15)

Smart Focus of Pivot Later?,
w/ Marc GRUBER

According to our guest, Dr. Marc Gruber, Vice President for Innovation at the Swiss Federal Institute of Technology — EPFL — you can’t win if you don’t know where to play. Instead of a just-do-it mentality and pivot later if it doesn’t work, Marc speaks with our host, Ben Robinson, about how true entrepreneurs and innovators are reflective and flexible and how they think about what they’re doing and in what market to play in. By the end of this episode, you are also going to understand what’s a good market to be in and you will learn about the Attractiveness Matrix and the Social Identity Theory of three kinds of entrepreneurs.

Marc holds the Chair of Entrepreneurship and Technology Commercialization at EPFL, and he is a world-leading researcher in this area. He is also a Deputy Editor for the number one empirical research journal in management, the Academy of Management Journal — so a very talented fellow. We are very happy to have him on this podcast. Now, onto our conversation with Ben and Marc!

Full podcast transcript:


Ben: We are at EPFL and we are with Marc Gruber. I think where we wanted to start with you, Marc, was to talk a bit about Switzerland. So, anybody who listens to this podcast probably knows that Switzerland tops lots and lots of innovation league tables. And so, as a nation, it’s really good at coming up with innovation, but it doesn’t really have any sort of leading top-of-the-food-chain tech companies. Do you think that Switzerland is good enough at commercializing its tech?

Marc: First, let me say I’m very pleased to be here. Thank you for inviting me to the show! It’s a true pleasure to discuss with you all the topics around innovation and entrepreneurship. There’s some exciting stuff, I think, we can get to discuss and it starts with your first question. I think it’s a very pertinent question. If you look at the tables, we are extremely good at generating invention, and we see this in all the patent tables per capita. We’re extremely good on these fronts. Where we still have a lot of room for improvement is the commercialization side.

So, if you look at the definitions, innovation is invention plus commercialization. Moving them from the invention phase to the innovation phase where you have a commercialized product or service, this requires very different skills. This requires skills about understanding customers, understanding markets, figuring out good markets, about testing your products, about understanding whether the customer likes the features of the product. This is very different in terms of the activities — it’s the inventive phase. You might be inspired, as an inventor, by some real-world problem, and that’s often the case, but it’s still something different to test it with human beings, to understand what the response of a human being means — and not only one, but multiple or hundreds or thousands, if you want to do serious market testing.

So, everything that has to do with invention, and then everything that has to do with the innovation step, the commercialization step requires distinct capabilities, activities that engage with this, and from that perspective it’s quite normal to expect that in the league tables we can be good in one dimension — like in the inventive dimension, with patents — and we might not be so good at the other ones.

Ben: So you are saying that Switzerland should be top of the league table for invention, but somewhere way lower down the list for commercialization, then?

Marc: Ideally, we should be high on both. The invention is fantastic! That’s a great outcome, that’s intellectual effort, but the financial returns, the ecological returns, the sustainability returns — if we talk maybe later on in the show, about the broadening of our concept of returns — if we look at all these returns in society, those come up only in the next step, the commercialization step, where you create the impact, where you scale it up. If we are not good at the second step, the impact remains more limited.

Ben: And why is there that discrepancy between invention and commercialization? Is it because of the size of the domestic market or is it more about the skill sets?

Marc: It starts with the skill sets. It starts with the skill sets and then, it’s something that I see in my practical life, when I work with the startups, when I work with large companies, but that’s also part of the research I do. It clearly shows the skills and the inclinations to do these things also differ between people. You have some people who like to do technology, others like to do commercialization, and few people actually like to do both or are able to do both. If you look out there, there are few great leaders of companies that can do both. Think about Steve Jobs — he was good on the tech front, and he was a fantastic marketing person; maybe even a more marketing person than a tech person. I think it’s the skills, it’s the attitude and we are extremely good on the mental front, and I think we can be better on the commercialization front.

Ben: Do you think that those skills will appear just by themselves as companies have more success?

Marc: These initial skills to invent, I think we are solid with this, with the technical universities in Switzerland, and I think the amount of money we’ve spent in educating our population over the last 30–40 years, was extremely smart because we have really, really, really good technologists. What we have been starting about 20 years ago is to get into programs that support entrepreneurship, innovations, the second step, and educate people on this front. And we see it here, at EPFL, very concretely, where we have now a multitude of programs where students don’t only learn about the concepts, but apply the concepts so that they understand what it means to bring technology to market.

I think that’s where we are investing now. What we try to teach them, which is not the easy part, is this mentality issue of going out there, being more extrovert, talking to people, being able to convince other people to buy a product. These are very interesting skills and an important skill set, but it’s something that might not be so close to the culture that we see here, in Germany, in Austria, and in neighboring countries. In the United States, Americans are much better on these fronts.

Ben: So, you could argue that they’re better just because innately they’re better, but clearly one of the differences is that there have been so many successful companies, and success begets success. If you’ve commercialized one product and you know how to do it, then the likelihood is you stand a much better chance of doing it again versus somebody who’s coming at it fresh. So, isn’t that the bit that’s missing in the Swiss ecosystem?

Marc: Yeah, we have these reference models that are now popping up — we have quite some successful unicorns now in Switzerland, we have a few very good successes, but this is why we bring the students also into other ecosystems where they see the more advanced companies. What they realize is, I think, two things: First, they are inspired, but second, they see that water boils at 100 degrees Celsius. They come back and say if these guys over there can do it — and over the means students in Silicon Valley, and we send students over there for trips, for stays, for four to eight weeks, we have a desk at the Swissnex where they could go. Once they come back, they say, “Actually, we have all the ingredients here in Switzerland as well, to be successful.” Let’s take the smallest of our market, even, as an advantage because we are born in a small country that makes us much more open, if we want to conquer markets, towards other European markets by birth.” Either we are open-minded and start internationalizing early or we are staying small in the canton of Zurich. Let’s put it this way, that’s not a really strong impact you could have.

Ben: It’s almost like that maxim, which is you should be global from day one. It’s almost like, “Hey, you have no choice.”

Marc: You don’t have any choice. And what we also see, from the research side is quite interesting that there’s always this imprinting of the nationalities that you have on the management team, that foreshadows the internationalization strategy. So, if you have three nationalities on the team, the likelihood that this team will internationalize earlier is much greater than if you have only one country nationality represented on the founder team. That’s quite promising, as well, because we are a country that is quite diverse, the startups that are created here at EPFL are quite diverse in terms of the background of its founders, and that makes it more likely that they internationalize and I think that’s not only good for the country, that’s extremely important for the company.

Ben: Perfect! So, I want to talk a bit about your book, “Where to Play.” So, it’s a book and it’s a website, so you don’t have to buy the book necessarily to get access to some of the methodology.

Marc: Absolutely, no! Actually, all the tools are available for free and if you want to learn more, you can even get a free online course. If you want to buy the book, of course, buy the book! It’s a lovely book, we spent a lot of time working on it, and I think it gives you additional value, but the core of the method is out there for free.

Ben: It is a lovely book! It’s a book that I first came across thanks to Steve Blank, who wrote a very nice review, and the way he positions it — and I guess this is the way you position it as well — it’s like a very nice complement to some of the other tools, the business model canvas and so on. But the key difference being that it comes before, it’s like a precursor to doing the latest stuff, because until you’ve figured out which are your most attractive markets to operate in, then it’s premature to think about product-market fit. So, can you just explain to us a bit the concept, the importance of “Where to Play” and how people have maybe underestimated that until now?

Marc: Yeah. So it’s very correct what you say. Steve Blank wrote an extremely nice blog post about the book and the method that is behind it.

Ben: We’ll share the link to that, for the listeners.

Marc: Excellent! And what you said is, basically, the tools that were in the Lean startup up to that point were mostly focused on being successful once you know your domain — figuring product-market fit and developing a business model within that market. But these tools didn’t really help you to figure out where to start. What is a good market to be in, in the first place? And then he said that’s why he’s adopting the tool actually, for his Lean toolset, which is a wonderful badge of honor for us because it’s one of the most important, if not the most important innovation tool that was developed in the last 20 years, two decades — and to be adopted by the person at the origin of this is just a fantastic recognition.

So, me and Sharon — my co-author of the book and co-creator of the method — of course, we had big smiles when we got that badge of honor from Steve. But generally, the book is about trying the method that is underlying this, it’s trying to figure out what are good markets to be in because you could be in a very lousy domain and do all the stuff — you can develop a business model, you can do market testing — but then realize only after a while that actually, “Hey, that domain was not so great and I need to pivot to another one.” I still have to find the first venture team or corporate innovation group that likes to pivot. So, if you can somehow be a bit more foresightful — and I don’t want to say that you can predict the future, that’s not at all my thesis — but if you can be somehow a bit more foresightful and say, “Hey, there’s a better market here than there. Let’s first go into this turf before we try the other one.” I think then, you’re actually significantly more successful.

the question, “Where to play?” is always a sibling of the “How to Win?” question. If you are lousy in the “Where to play?” question, you will be inferior in the “How to win?” question because if you’re winning a super small battle in a small market, great! You have won! But you have missed out the big other alternatives, and that’s where I think they nearly need to go hand in hand.

Ben: So, I was going to ask you that. It’s almost like we’re given to believe that the pivoting is almost a natural part of the course, but what you’re saying is that actually, it doesn’t necessarily need to be because if you spend a bit more time understanding your market opportunities, then the likelihood of pivoting is decreasing. Do you have evidence to prove that those really unpleasant 180-degree pivots happen less frequently if you use that method?

Marc: I have done 15 years of research before I wrote the book. As a researcher, I said I’m going to write something where I know that all the empirical results point to some method that makes me more successful. And what it does is, I think, twofold, and let me describe this with an example. Flyability is a company that is here at EPFL, they are producing drones, and they have drones in a cage. And with this type of company, the question, really, is where do we apply this? They had the idea to say, “Okay, we go to nuclear disaster sites, atomic reactors, and the drone can go in there and get a good idea of the debris and of the casualties that might be there, as bad as it is.” But there are many other domains where they could inspect: electric landlines, pipelines, indoors, outdoors. So, it’s really about figuring out a good starting position. And if you think about it, yes, this company, once it sees more opportunities, there are some that are better, markets that are growing quicker with less competition, where the customer demand is stronger, where the development costs are smaller than other domains.

We’re living in an age where the industry boundaries are imagined boundaries

The first element that they learn is, “Well, we can actually start with a better, more fertile ground.” The second element — and that’s equally important — is that yes, but we still don’t 100% know if this works out. Once you have this wider lens, you become more sensitive to many decisions in your company and don’t dig yourself into a ditch so quickly by saying, “Hey, I’ll call my company now

Ben: Yeah.

Marc: They called themselves Flyability, and that gives you a lot of flexibility in case you have to pivot. Also, you have a double benefit out of applying the method. Number one, figuring out where a better market is, and number two, actually figuring out that you can be a bit more agile because you make decisions that put agility into the DNA of your business. So, even if you have to pivot, it’s much less painful than if you are just moving into one direction and see that as your one and only goal, and then realize after half a year, that this doesn’t work out. By the way, the statistics say that 73% of all companies need to pivot before they actually apply the method.

Ben: And do you know what it is now, post hoc?

Marc: No, we haven’t done that yet. But we see that the companies are created very differently. People have an opportunity set — that’s a portfolio of growth options. They go out there, pitch this portfolio of growth options to the venture capitalists and business angels, by saying, “That’s our first market. If this one works out, that’s our future growth market. If this first one doesn’t work out, this is our plan B.” And this is a super interesting storyline for any VC because a venture capitalist knows that they know the market and number two, they are de-risking the project by saying there’s a plan B, in case the first one doesn’t work out, and they have a future growth option in-store, which means more value creation; or they might even have two-three more growth options in-store. So, in that sense, all the feedback we’re getting from the financial community is they are super excited, they would wish that every company would apply that when it actually comes to their turf and seeks for funding.

Ben: So, I just want to test, slightly, the premise on which the book is built and the methodology is built. So, the premise is that every product doesn’t have just a single potential application. There are many potential customer groups and markets for any given product. And I was just reading this thing from Bain, and they basically take the same premise that you do, and they say what becomes important is not just to identify exactly where to play, but instead to focus on how to win because we’ve seen that the commercial world isn’t tightly grouped into industries anymore, but arenas — which I think this the terminology that you use as well — then what’s most important is having a sort of a competitive edge and having an execution edge to be able to win across large arenas now. How do you see that sitting alongside?

Marc: I think that this perfectly matches. I think the question is how to win, but you want to win in a good market.

Ben: Yeah, that’s right!

Marc: That’s why the question, “Where to play?” is always a sibling of the “How to Win?” question. If you are lousy in the “Where to play?” question, you will be inferior in the “How to win?” question because if you’re winning a super small battle in a small market, great! You have won! But you have missed out the big other alternatives, and that’s where I think they nearly need to go hand in hand. And what you’re saying is quite important, let me emphasize this. This question that we just started to discuss for the startups is of equal importance for the large companies.

We’re living in an age where the industry boundaries are imagined boundaries; we have the most successful companies actually moving to across industry boundaries — Rita McGrath calls this competing in arenas — and this is super important for large companies, too. Think about Daimler. Daimler is not worried about BMW’s competition. They are worried about the computer manufacturers, the Apple’s, the Google’s coming into the world of car manufacturing. If you look at Uber, Uber was born as a taxi service, but Uber moved into food delivery, Uber moved from food delivery now into tourism by offering tourism to vineyards, which is a smart idea if you’re trying to taste wine, that you actually have someone driving you. But they don’t care about the industry, they go wherever they can grow.

And look at Google, what they are doing, look at all their different businesses — they go wherever they can grow with their competencies. So what you said earlier with products, you need to look one step below and say, “We have competencies that generate these products” and if you maybe add from a large company’s perspective, AI or drones to the mix of competence, maybe you can do even something else, maybe you can offer new service.

Think about maybe one of the most traditional businesses — construction businesses. If they add drones to their mix of competences, they can offer everything from construction site inspection toward inspection of the fully-furnished site later on because they have all the knowledge about the construction process. In the second step, they will have the advantage to say, “We are actually better able than other companies to monitor the sites and to monitor the degradation of the site over time.”

And also, the logic that is out there is one where you very much now look for growth turf based on your competencies, and the initial question is actually where to play, and once you’ve figured it out, it’s how to win — and then it’s about figuring out a good business model, it’s about figuring out a good customer fit, etc.

Ben: Geoffrey Moore’s “Crossing the Chasm”, talks about leaving the relative safety of your first market to then get into the mainstream and how that’s almost like a trial and error type person. So, are you saying that if you employ the “Where to play?” from the very beginning, crossing the chasm is that much easier because you’ve sort of already identified the stepping stones? I think you actually used the term of building blocks. So, you’re saying that you’d almost build the tower that gets you to cross the chasm.

Marc: Exactly! And if you look at a Geoffrey Moore, he has this analogy with the pins that are falling — you focus on one and then it’s the other. But, in a way, it’s the same logic or a similar logic, where you say, okay, we need to figure out the first one to hit, and which is the most fertile ground that we can foresee, somehow. Then, when we enter there and are successful and go through the diffusion curve — we start, of course, with the people who are highly engaged in this market, there might be opinion leaders who talk about our product, so that we get into this most fertile ground, grow our tree there, to use another analogy, become strong there and then we can say, okay, now we branch out into the other domains that are related.

But what Geoffrey Moore has not explained so well in his book, but what’s basically then, in “Where to Play”, is the logic where you say, what could be this first pin? What are the other domains that we could get in? How can we structure a company or a project so that we actually have the capabilities that are more flexible, so that you can more quickly and more efficiently enter these other domains? This is in a time where everything goes much quicker. These are very important considerations. So, in that sense, I am a big fan of Geoffrey Moore’s book and I think we are perfectly complementary with the thought world.

Ben: Yeah, exactly, it’s complementary because you know that diagram where you sort of jump off one side and hope to get to the other side. You build the stepping stones.

Marc: Exactly!

Ben: Yeah. I think probably it’s natural now to talk about the attractiveness matrix that’s central to the book. So, there are two axes: one is challenges and one is potential, right? So, the first question is, could you talk us through that matrix? And then, maybe, I suppose, as a follow-on, how do you arrive at some sort of objective score for those two matrices?

Many entrepreneurs say, “Okay, yes, we have an idea about the market attractiveness and the challenges” but they typically only take one or two dimensions. They say, “Oh, it’s a big market! This must be good!” Or “Oh, we can make a quick entry. That must be good.” And they don’t see the full picture of what shapes a good market.

Marc: Absolutely! Let me briefly give you an overview, for the listeners. So, the method has three parts. The first part is about understanding the opportunity set, being creative, understanding — like in the Flyability case — where we can apply our drone to everything from inspection of bridges, up to the inspection of avalanche sites — so we have an opportunity portfolio.

When you look just at the description of a few of these examples that I’ve given with Flyability, somehow is almost obvious that not all markets are equally good entry points. Also, you need to have, in a second step, an evaluation, and that’s exactly where you can come in with the matrix. This matrix has two dimensions: it’s a challenge dimension and it’s a potential dimension. And we, Sharon and myself, we screened about 40 to 50 years of venture capital research to understand what type of features are of high importance to make sure that you are able to evaluate early-stage opportunities. And just look at a couple of these features: it’s, for instance, market size, it’s the strength of the customer needs, the ability to pay, it’s about the time that you need to develop the product, the time you need to make the sale, it’s about external risks that you cannot control, etc.

There are a couple of factors that are the main factors that you can get out of looking at these 40 to 50 years of venture capital research, and that’s, of course, not practical for the entrepreneur to go through thousands and thousands of pages. So, what we did is, within that matrix, we have two dimensions: the potential and the challenge — and behind it is a worksheet that helps you to score each opportunity. Sometimes you don’t know how to score it maybe on the market size front, so you would have to do some backup research to understand, is this a small market? How many bridges are there in Switzerland, in France, and in Germany, to understand what is the potential market size.

So, based on the worksheet that has a potential dimension, as well, and a challenge dimension to score, you come up with a summary score that you put, then, in the matrix. This matrix has four quadrants, and also, if you add the potential and challenge, we have the Moon Shot quadrant. This is high potential — high challenge. As a joke, this is the Elon Musk quadrant; everything he likes to do is in the Moon Shot quadrant.

You have low potential — low challenge: these are the Quick Wins; basically, it’s the lower-left corner. You can say, “Hey, I can go in there, I can make an easy living, I can make a first hit.” This might be the first hit that then gives you a stepping stone option towards something else.

You have the Questionable with a high challenge — low potential, where you might wonder if this is a good idea to do. If you feel suicidal, maybe you should do this, but we don’t recommend it.

And then, you have another quadrant, which is high potential — low challenge, which is the Gold Mine; those actually exist. It’s just that it’s low competitiveness, high market growth, strong customer demand, quick sales cycles, etc. And those actually exist, you have to look at them and try to rate them.

What we see with many entrepreneurs before they apply this method is that they say, “Okay, yes, we have an idea about the market attractiveness and the challenges” but they typically only take one or two dimensions. They say, “Oh, it’s a big market! This must be good!” Or “Oh, we can make a quick entry. That must be good.” And they don’t see the full picture of what shapes a good market.

Ben: Yeah. And I think, also, doing it this way removes the subjectivity because we tend to see things from our own prism. That’s a challenge I’ve seen personally.

Marc: Absolutely! You’re completely right! It’s like, either you rely completely on a gut feeling or you are subjective in scoring. But we designed the tool so that it’s a wonderful tool to work in teams with. So, you can say, “Okay, there’s Ben, there’s Marc, there’s Roger, there’s Henry and Fabiola, and we sit together and we are scoring together, and let’s see where we end up.” And at the end of the day, it brings the team together, and they say, “Hey, we did this together. We figured out this is the best point to enter” and I think, in that sense, we didn’t put this to the forefront, but when we observe the teams that apply it — it bonds the team because they discuss and decide the strategic questions together.

Ben: I think is implicit in what you said earlier on, but what you’re recommending is a portfolio approach, right? Which is to say, if there’s a Moon Shot, maybe pick a Quick Win to ally with the Moon Shot.

Marc: I think what you’re describing is very important because if you think about having a portfolio, it gives you additional abilities as a founder or innovator in a large company. Why? Because you actually can say, “Hey, I start here, here or here, and if I want to do the Moon Shot, I’m now more sensitive to the fact that I have to have much more resources, and it takes probably much more time than I expected.” So, you’re a bit more careful. That’s what we typically get as feedback from the people who say, “Okay, we have a Moon Shot, we want to do this. We thought we only needed to raise 200,000 from the VC, but we actually need 5 million.”

But we are not prescriptive at all by saying, “Hey, you need to do this or that.” We leave that up to the entrepreneur or the innovator. Sure, if you want to do a Questionable, go ahead and do a Questionable. If you want to do a Quick Win that is small, and that’s your domain, just do this. But be aware that these are the growth possibilities — and they differ — and be aware that maybe if the Moon Shot or the Quick Win or the Gold Mine should not work out, that there’s a plan B so that you don’t waste all your resources. If you’re more successful, yes, you can start in the first one, and then you’ll move to another one. An entrepreneur is a bit more of a reflective person, which is countering this can-do attitude, the just-do-it attitude — which bothers by now many people. Within the business domain, there’s this mantra of, “Oh, just do it, and then you pivot.” I think that in no part of life, we have this mantra. We tend, as human beings, to reflect a bit before we actually do it. I think, ultimately, what the book is about, is getting a bit more reflection on the whole process.

Ben: Yeah, and having worked with a lot of startups, I think that’s one of the friction points — the founding team suddenly needs to raise money, and then, the venture capitalists or whoever the external investor is, starts to ask all these kinds of questions, and it’s obvious that these were not thought about in ex-ante, right? And instead, they’re retrospectively trying to add this lens of, “This is where we’ll go next.” And so, I think is extremely helpful to have been through this process when you’re trying to raise money, for example.

Marc: Absolutely! What we see is that, from the venture capitalist side, they say, “Okay, if all the companies that apply for funding would be so explicit and so transparent of what they want to do, it would not only help us to judge the venture, but it would also signal to us that these people understand what they do.”

Ben: And you said, also, earlier on, this idea that once you appreciate that you’ve got your first market and you don’t have to do these really harsh pivots because you know where the next landing point would be if it doesn’t work out — you said that that determines things like what you call the company. But there is a whole list of things in the book about the sorts of things that you would want to be mindful of, when you start, given that you are likely to pursue multiple markets given that you’re operating in an arena.

You create a path and that path gets more fortified, stronger with each and every decision that builds on this. You go for a market, you choose your suppliers, you choose the brand name for that market, you develop the distribution network for that domain, etc. So, with each subsequent decision, you are more constrained and locking yourself in, which when you think about it, of course, it focuses you a lot, but it’s also something which with each step, it becomes more expensive, less efficient, more cumbersome to change.

Marc: Yeah. What we advocate is, as a small team, as a small venture — three or four people — to focus on one market, but if you are a large company with 50 people working in innovation, you can pursue multiple markets at once. But, especially when you’re extremely resource-constrained, what you need to do is to say, “Okay, I need to put a lot of agility into my project so that every change that I need to make is less cumbersome, not consuming a lot of resources” because your resources are not endless. And when you think about this, once you have this portfolio view of what you can potentially do, just go back to the Flyability example — once you understand that you can actually go from construction site to rescue missions in the Alps, what you are picking is a brand name that is different, that allows you to do many more things. Number two, what you’re trying, probably, to do is to say, I develop a product — the drone, in our case — which is within a few steps amenable to all these different markets, it doesn’t cost a lot to actually change the product so that it can be applied in all these different domains. So you might want to hire people who have a bit more generalist expertise to understand, “Okay, if this one is a great domain, maybe these people can also work on this other domain later on. It’s how you write your patents, the applications of your technology in there.

So, it has a range of implications that are very profound. And this goes down to the nuts and bolts of the company you create, the project you pursue, and that’s why I think this mindfulness at the beginning is then imprinted into the DNA of the company, of the project you’re creating, and I think that, over time, you’re creating a company that is more agile, has the agility in the DNA, has an outlook on growth that is quite different.

And if you think about the earlier example that I mentioned with Uber — Uber has exactly that mindset. They say, “Okay, we grow in this taxi domain, but that’s not all we do.” No one mandated Uber to just stay in this domain — they could grow in all kinds of different domains.

Now, think about the banking sector, which is quite important for Switzerland. The banking sector, they have this idea of saying, “We have financial services”, but if you move out of this logic, and say, “Actually, they could be about trust services.” And once you’re about trust services, finance is one leg that we could have and maybe there are two or three other legs that we can develop wherever trust is needed among human beings. Maybe blockchain is a key part of the skills we need to acquire and build, in order to be a viable player in trust services. This would be the Uber logic to the financial industry.

the zooming in — zooming out is a prerequisite towards seeing a portfolio of opportunities

Ben: I won’t ask you about blockchain because we’ve made that mistake on previous podcasts. It’s a bit of a rabbit hole.

Marc: They can listen to the other podcasts.

Ben: So, if you set up your company with the notion that it’s a portfolio play from the beginning, you’re saying that it’s almost in the DNA, this idea that you will be agile. So I accept that that’s true, but there’s still the temptation to always double-down on a market that’s working. And so, what else would you recommend to companies to make sure they’re agile, and they don’t become, in the Clayton Christensen sense, they don’t go so deep that they, then, become disruptors for somebody else?

Marc: Look, they can go deep as long as they are realizing that these decisions are creating these deep ditches of past — we call this, in research, “Path Creation”. You create a path and that path gets more fortified, stronger with each and every decision that builds on this. Let me give you an example. You go for a market, you choose your suppliers, you choose the brand name for that market, you develop the distribution network for that domain, etc. So, with each subsequent decision, you are more constrained and locking yourself in, which when you think about it, of course, it focuses you a lot, but it’s also something which with each step, it becomes more expensive, less efficient, more cumbersome to change.

That’s why we call the third step in our method, “The Agile Focus” because you should focus, yes, but keep in mind that once you do these decisions — like with the brand name — maybe you can make this decision in a bit more open-minded manner so that in case it doesn’t work out — and in innovation, oftentimes it doesn’t work out — in case it doesn’t work out, you are able to not fall into this big ditch that you have been shuffling, and don’t die from that.

Ben: And the other thing too, in the book, is “zooming in and zooming out.” So, we’ve come across zooming in — zooming out in the John Hagel context of having multiple time horizons for our strategic planning, but you use it more as in like, when you’re identifying target markets, you want to look at the highest level of what’s the massive group that you could target versus what’s the sub-segment of this industry that could potentially be addressable by the product. Again, what’s the repeatable methodology for doing that?

The rules of the growth game have changed and with it, the applicability of the frameworks and the need for frameworks. If we accept the idea that we are competing in arenas and no longer in industries, all the tools that would constrain you to think within an industry are not as meaningful anymore.

Marc: I think this has very deep roots because, in our research with Ian MacMillan from the Wharton School, we have continuously seen this into an entrepreneurial mindset. The true entrepreneurs and innovators are able to flexibly think about what they are doing — they’re not like a hamster in a wheel and say, “Okay, we have to run, and run.” They have this reflective capability.

Let me give you a simple example. One of the inventors here, at EPFL, one of the professors, developed a stent. This stent is basically for preventing your heart disease. But at the same time, he said, “Look, this is heart disease prevention, but we can apply this in the whole body.” Then it’s about blood flow technology. And if you zoom out one step more, it’s about flow technology — then, you think about pipelines, etc. So it’s like, you have from the very small narrow application within the heart towards everything blood flow technology, to flow technology. And that’s what a good entrepreneur should be able to say: I move out and I move in. The best application might be the heart, I don’t want to challenge that, but it’s like, “Hey, where else could we grow? What is our company about?” This a very profound definition.

And once you think about this zooming in zooming out, you can say, “Hey, that actually doesn’t cost me anything to reflect on this. This costs me a bit of time but makes me understand better what type of animal company I’m creating. So, in that sense, the zooming in — zooming out is a prerequisite towards seeing a portfolio of opportunities.

Ben: So, as I’m understanding, your value proposition is, at its most granular level, and then being able to zoom right from there to what’s the largest possible application. So as you said, with financial services, it’s understanding that we do trade finance and invoice finance, right through to which we’re about trust.

Marc: Exactly! But what I’m describing is only a cognitive process. It is purely how you allow yourself to think about it and then it relates back to what’s the makeup of the founding team or the management team. We have, since 30 or 40 years ago, a lot of super exciting research in the management domain where we see clearly that the makeup of the board, the type of experiences they have, their education is basically foreshadowing what the board will be able to do. So, if you have four people who have studied finance on the board, of course, the likelihood that this company does more finance and has that lens is much higher than them going into another domain.

If you make the same analogy now and say, “Hey, we have four people in finance, and three that have actually a blockchain experience”, guess how this company will redefine where it plays? So it’s a lot about the makeup of the founders or any management board of a company that basically, somehow is able to foreshadow what this company sees in your growth pattern. This insight is not from me. I’ve shown it empirically with my research, but from a conceptual perspective, there’s this late 1950s, Edith Penrose’s “The Theory of the Growth of the Firm” — a wonderful book; I think one of the most fascinating books that one can still read and it’s so current as probably has never been before.

Ben: One application, clearly, of the “Where to Play”, is when you’re starting out. You’re saying it’s also extremely useful for strategy teams and executives in an established company to provide answers about where to go next.

Marc: Absolutely!

Ben: That being the case, do you think it replaces some of the tools that the strategists are using today? For example, the BCG Growth Matrix. Do you think some of these things have become a bit antiquated or obsolete given the way the world has changed, both in terms of the nature of competitive advantage, i.e. that it’s more about the demand side, economy’s at scale, and also, the fact that we don’t have these narrow boundaries of what’s in an industry and what’s not?

Marc: I think that the rules of the games have changed. The rules of the growth game have changed and with it, the applicability of the frameworks and the need for frameworks. If we accept the idea that we are competing in an arena and no longer in an industry, all the tools that would constrain you to think within an industry are not as meaningful anymore. Think about Porter’s Five Forces — it’s a fabulous tool to understand the industry, but it doesn’t help you to understand the growth space beyond the industry — this arena.

That’s where, “Where to Play” comes in play because it actually gives you an idea of what is the growth turf that might be available for you, so it enlarges your perspective. And when you come to the large companies, they are in dire need of this type of perspective, and partly owing to the fact that most of the leaders running these companies were educated in the ’80s and ’90s. They know, of course, from the MBA programs that Porter’s Five Forces is the thing to do — but implicitly this constraints you to the industry. Once you come with an arena perspective, for the large companies this opens up very exciting new growth options. If you look at the interviews that Daimler is giving, the large companies are waking up to that very quickly. They have adopted not fully this mindset that there’s an arena out there, but they are starting to realize that competition comes actually from places they would never have expected.

That’s where they learn through the backdoor that actually there’s an arena, “A computer manufacturer suddenly competes with us. Whoops! We thought it would only be the car manufacturers.” So, they learn through the backdoor that actually there’s an arena to play in, and secondly, what they are realizing as well, is they have this set of competencies, “What else can we do if we now put AI to the mix?” If we put drones to the mix, like this construction company that I was referencing early on, it’s like, yes, you have your constant competence that has been around for 50 years, but now take drones into the mix. What else could you do? You can become a service business that is quite successful.

So, it’s about understanding how, as an established company, you can employ the latest technology, increase the scope of your product offering, service offering, etc. And I think there should not be a threat to any company. This is a wonderful process because it relies on creativity, imagining new frontiers where you can grow, and this is, I think, applied in the right way. It’s a truly exciting process that should energize everyone on the team. I know that the companies are worried because they see there’s competition coming from left to right.

Ben: The other thing that’s, I think, good about it, is it looks from a capability point of view, which is some of the tools that strategists use, and assume that the customer is captive, in a way; because you control distribution, you can just upsell. You know, like the Ansoff Matrix — keep the customer, the customer is fixed and you can sell them more stuff. I think that that’s been deeply challenged as distribution has opened up. And so, again, it doesn’t look at it through that distribution prism, it looks at it through capability prism.

Marc: Yeah. Or you can look at it through a distribution prism as well and say, “What other products could this customer need?” And then you evaluate these types of markets or options with a matrix tool. Our framework is, in that sense, quite flexible.

Ben: So, in other words, it sort of fits around. So, if you’ve got a matrix or a methodology you’re comfortable with, this tends to be always complementary?

Marc: So we are, in a way, highly complementary even to the Porter Frameworks, to the Ansoff Matrix, or to the BCG Matrix. You mentioned the BCG Matrix early on; the underlying question is, where do your new growth options come from? There’s no answer given in the BCG Matrix. It’s just like, “Oh, they’re rising stars!” Where were they born? Someone must have had the idea for this rising star. That’s where, “Where to Play” comes in with its method because it helps you to understand there could be a growth opportunity, a rising star, how rising and is it really a star or is it a dot, and it helps you to understand in the first place what you’re developing.

Ben: Another piece of research you wrote, which is about the characteristics of founders. You used the terms Darwinians, communitarians, and missionaries. Could you elaborate on what you mean by those terms?

The times are over where financial profit and job creation are the only two factors that matter. They are a long over. I think the companies who haven’t realized this are soon in the cemetery of companies.

Marc: With pleasure! It’s actually, one of the research studies that I learned most about entrepreneurship from, or innovation, or life — this is a big term, but I’ll explain in a minute why. We have done this study where we tried to understand entrepreneurs within one sector, to keep the heterogeneity low — it was all kinds of sports-related equipment, and there were entrepreneurs that actually were like the normal brands, very competitive. We said, “Okay, we need to develop something that gives us a lot of return.”

There were other entrepreneurs that were more the thinkers, they developed something for themselves, went on the slopes, for instance, others observed what they did and said, “Can you do this snowboard for me? Can you do this bike for me?” And then, you have a third type where you realize, “Well, these guys are not caring so much about the market, the producers, because they want to sell something, but they want to change the world to a better place.” They are about ethical production, etc.

We started off this project by interviewing these people on why do they actually have these different outlooks of what a company could be? Why would some of them give their invention for free to others, while others would patent protect it? And then, that gave us quite a lot of hard thinking to do.

And with my colleague, Emmanuelle Fauchart, at some point, we had discussions when I said, “Okay, I’ve done this study once, about identity.” And then, identity was basically the key that opened up this puzzle for us, because identity theory allows you to understand on a very deep level, why people do things. And what we did then, is to say, hey, there’s a more generalizable framework within our data, which by now has been applied by many other researchers and what we basically saw is that there are three types of entrepreneurs, pure types, and you can mix and match them at the end of the day.

The pure types would be the Darwinians who say, “I fight for my business, I’m the leader! If others in my market die that’s good because I have a better market share.” That’s one very typical way of viewing business. The others were the communitarians, who say, “Oh, we are within a community, we openly share. We are trying to make the community a better place.” And the third type was the missionaries where it’s about the whole world, “We want to make the world a better place.”

And from an identity perspective, that’s where it becomes interesting in two ways. From the identity perspective, this goes from the “me” to the “known other” to the “unknown other”. How you behave and act depends a lot if you do it for you, if you do it for known people, or if you do it for unknown others. What you expect as a return is quite different, too. If you do it for you, at the end of the day, your bank statement would be bigger. If you do it for the known others, maybe it’s love, it’s admiration, but if you do it for the unknown others, what is it that you’re getting out of there? Maybe you have a better conscience or maybe you’d like to be admired, maybe you want to be invited to talk shows. The motivators are very different, and if we are living in a world where people are soul searching and trying to understand who they are, what they want to do, these types of questions are extremely pertinent. They are relating back and that’s what we found after doing all these interviews, they are relating back to some very exciting parallels in philosophy — you have these three types described, repeatedly.

So, what we basically could show is that within entrepreneurship, we have types that have been for the last 2000 or more years discussed by philosophers as standard types of how we can think about human beings. In that sense, what I said earlier, to help you to understand entrepreneurship and innovators, but also human beings because these three types are the pure types, that are prevalent, but then you have mixes.

Ben: Yeah, what do you call it? A hybrid, right?

Marc: Yeah, the hybrids! If you think about companies nowadays that try to make profits, but also be sustainable, these are hybrids. And how their motivations might be in conflict, how they are aligned, I think identity theory can tell us a lot about this.

Ben: And would you argue that the hybrid model is becoming more prevalent, not because the makeup of the founders is changing, but there’s more constraints imposed by society to look beyond just financial returns?

Strategy and innovation are two sides of the same coin

Marc: Absolutely! I think that the times are over where financial profit and job creation are the only two factors that matter. They are a long over. I think the companies who haven’t realized this are soon in the cemetery of companies. It’s a much more pluralistic approach and it comes from the side of the founders or the managers, but it also comes as a demand by customers, but also by future employees. It’s like, if you want to have the best employees out there — I see it with the students here, at EPFL — if you are only profit-minded as a company, they will likely not choose you. They want to have this second leg, the social consciousness and the third leg, the sustainability consciousness embedded in what they do because they look for this meaning and they know that the world is breaking apart, so they want to work positively in an environment that allows you to follow these other goals.

Ben: I wanted to ask you about the coexistence of “Where to Play” and some of this other research. It feels a bit like “Where to Play” was written for Darwinians, but can it be used by all founder types?

Marc: Yes! “Where to Play”, in its purest sense, is written in the business logic to say “I want to create a company, I want to be successful” which is fine. I don’t want to challenge that. That’s still a model that creates a lot of wealth, that it creates a lot of good, and a lot of tax returns. What we have done now is an add-on that is available on our website where you download worksheets that help you understand if you want to create a social and sustainability venture, how to rate these opportunities and how to understand all the trade-offs between the profit side and the social side. I think this is extremely pertinent. So, the tool is now enlarged with these types of thoughts, and I think, from all the feedback we’re getting from social and sustainability ventures, this is a very important add-on because it allows these entrepreneurs to see more clearly how they could contribute and what it means, actually, to have sustainable and social impact.

Ben: Wonderful! I think there’s one last thing I want to cover. So, in all the years I’ve worked in strategy, each year, somebody, somewhere, some commentator proclaims that there’s a strategy. One of the things that’s great about reading your book is that it’s a return to fact-based, research-led strategy, which enables you to do what is the very heart of strategy, which is to make good choices and understand your constraints. And so, not to put words in your mouth, but I guess you would say that this book and this approach very much represents the triumph of strategy over the emerging school of just pragmatism and pivoting and iteration.

Marc: Yeah, I think it helps to bring both perspectives under one roof because it basically gives you a home for saying, “Hey, that’s more the strategic thinking and that’s more the testing, the reiteration that is needed to validate what you have thought.” So, it brings together the doers with the thinkers, and I think it gives them a home. I think that’s why Steve Blank liked it so much, as well, because it says that’s a part that was missing. He probably gets a hundred of these frameworks to look at every year and has been doing that for the last 20 years, and this is the first time he ever opened his toolbox in the last 15 years or so to say, “That’s a key new tool that needs to be in there.”

But, I think if we frame it nicely, strategy evolves, and I think we are thinking very differently about strategy nowadays than just maybe 15 years ago. And strategy and innovation are two sides of the same coin. It’s just how they work together — one is a world where you have to explore, where you have to investigate, where you have to test and the other is a world where you have to be a bit more foresightful, you have to try to understand where you’re strong at, what a good market turf is. How this interacts, I think it’s nicely described in the “Where to Play” framework because you have the markets you choose, there’s more of a strategic outlook, having a portfolio and then, on top of that, you say, “In order to understand these different options, of course, I need to test! I need to go out there, I need to collect data” but it gives you a framework to think about both, and I think that’s where this addition to the Lean tool makes sense because the Lean tool is one very much where you do experimentation testing, and now this gives you an additional aspect to do strategizing with.

Ben: Perfect! So, for those people who want to check out the toolset — which, as you said earlier, is available for free — the URL is, right?

Marc: Exactly! And I invite everyone. We have videos on there, there are PowerPoint slides that you can download for free, you can listen to webinars — there’s basically a lot of opportunities; For us, this is a tool that we want to see out there because we’ve seen in the research that it works, we’ve seen with thousands of startups and large companies that applied it, that it works.

Ben: There’s no excuse, now, if you blindly enter a market and you have to do a horrible, dramatic pivot.

Marc: Yes, there’s no excuse! Maybe after the first pivot, you realize that maybe you should have read the book and you read the book, then. It’s still valuable. You can start as an established company reading the book and try to figure out the new growth turf or you can start as a startup and say, “Let’s be a bit more mindful about what we’re going to do.”

Ben: Perfect! Mark, thank you very much, again, for coming on the show! That was great. Thank you!

Marc: Thank you very much! It was my pleasure, and good luck for everyone out there!

Strategy is dead. Long live strategy! (#5)

Strategy is Dead. Long Live Strategy! with Markus MENZ

Strategy is Dead. Long Live Strategy!,
w/ Markus MENZ

Together with Markus Menz, Professor of Strategic Management at the Geneva School of Economics and Management —part of University of Geneva — we explore the role of corporate strategy in the networked age.

Resources referenced in this podcast:

  1. February 2019:  — co-authored by Markus Menz, along with Sven Kunisch and Julian Birkinshaw
  2. 2017: , Markus Menz and Fabian Barnbeck
  3. 1937: — Ronald Coase

You can follow Markus on LinkedIn.

Full podcast transcript:


Ben Robinson: For this episode we are talking strategy… Our guest for this episode is Markus Menz, who is professor of Strategic Management and Vice Dean for Development at the School of Economics and Management at the University of Geneva. Markus, welcome, Thank you very much for joining us.

Markus Menz: Thanks for having me.

Ben Robinson: How long have you been teaching in the area of strategy?

Markus Menz: I’ve been teaching strategy for more than 10 years now. I actually joined the University of Geneva in 2015, so now about four years there. Before that I was teaching on the faculty of the University of St. Gallen. I was teaching strategy there for six years and before that I spent a year at the Harvard Business School, I did research there… and prior to that I did a PhD at the University of St. Gallen.

Ben Robinson: Ok. I guess, I guess since you’d been in the profession for 10 plus years, you… like us, have seen lots and lots of change in how strategy works. Maybe you can kick us off by just giving us some kind of definition of how you see strategy, how you would define it.

Markus Menz: I mean, strategy in general, I would still say is very much the same than, than 10 years ago, at least when it comes to the, that’s a more general definition. I can give you an idea of what I understand a strategy and what I usually, explain as being a strategy. Strategy is to me still, and there are referred back to let’s say as the old days of strategy to Michael Porter and others, who said, strategy is about making clear cut choices.

I think that’s still true for today. Strategy is about making choices and it is about deciding, what to do as, as an organization, as a firm, and what not to do. And that’s the harder part of that question actually. And to me that’s still relevant, even though nowadays it may have changed how strategy is being done, what the topics of strategy are about. And of course, also who is involved in strategy these days. But the core question to me is still the same of question of strategy. It is about making choices and deciding where to compete and deciding how to compete and making choices where not to be active. And this leads to what I would refer to as a fundamental trade off between being strategic on the one hand and being opportunistic on the other end. And we’re gonna discuss this probably a bit further later on, but to me that’s very complicated.

Ben Robinson: Do you think that line, is that where the line has changed in strategy? Cause I think the way you, the way my Michael Porter defined strategy, the way you are defining strategy, where it’s about choices and in particular the bit that people forget… choosing what not to do. These were, these are almost timeless concepts, right? Strategy defined like that we’ll look, we’ll always be relevant. But, so I guess the question is more in this self dichotomy between what is operational and what is really strategic. Is that where the line is changing? You know, I guess another way to express it would be, is his strategy becoming more about how to compete and less about where to compete?

Markus Menz: That’s a fascinating question to me and what is relating for me is the challenge to define what kind of time horizon strategy concerns. And well traditionally strategy is being defined as being concerned with the long term and Alfred Chandler said it’s about, the development of the company’s long-term goals… and to subsequent allocation of resources to reach those goals.

[min 5]

And, I mean this was done based on a study of industrial enterprises back in the 1960’s. So, it is something that was true back then. That strategy is concerned with the long term and what the long term means. I would say to me strategy is still about making choices that matter for a certain time horizon. But the question is what kind of time horizon do you consider. And that depends very much on the context you are in and the context has changed and therefore also the time horizon of strategy has changed to me.

Ben Robinson: But do you subscribe to the view of that just simply planning horizons have shortened? Or do you also believe that the companies can operate with more than one time horizon? I mean, the reason we ask that is because, you know, we we’re a big fan of this sort of zoom in zoom out theory. If, you know, you can plan on a horizon of say, five years or 10 years when you’re making very big decisions about product strategy for example. But, on a more operational basis, you’re maybe trying to optimize on a sort of nine to 12 month window? So I guess the question is, have time horizon shortened or have they bifurcated or multiplied?

Markus Menz: I mean, referring to the first point, we do have evidence for that. The time horizons have generally shortened strategy. So, we did, for example a regular studies. Where we surveyed chief strategy officers over the leading 500 companies in Europe. And those senior strategists indicated to us, over the past couple of years, that the strategy horizons have shortened from close to five years to a bit more than three years. This was something that we could figure out in our surveys. But of course, and I can come back to your second part in a minute. But of course this very much depends on the context again and I see as a deciding factor still what kind of industry sector you are in. So what is your investment horizon, for example? Are you in a software, environment? Are you in a industrial environment, for example, or in a service business? So it’s very much dependent on that.

Ben Robinson: Does the data that you’re referring to, do you see noticeable differences depending on the sector? Like it does TMT companies have a shorter horizon than manufacturing companies?

Markus Menz: Yes, they do… there’s a variance across industry sectors. Definitely so, it depends on the industry sector. And then the question is, that’s the second part of your question. Well are there different time horizons to consider, from what I can see, I would say yes and I would say, that a greater alignment or unification between operational tests and short term strategic or tactical decisions, has become visible on the other hand. And it refers to the longer time horizon, I still see that there is a need for companies to have a long term vision. Or I mean you could use vision as an analogy here for, for strategy. But I think that’s still very decisive to decide where the company should, should be heading at. Not just over the next six to 12 months, but in the long term.

I mean you, when you use this dichotomy, I’m of course, I’m asking myself what is it with the time in between and how to operate between those time windows. That’s a challenge that I see is to align the two.

Ben Robinson: But yeah, I think, and I don’t know if you have evidence to this effect, but it seems to us that the, as you say, but keeping a very long term time horizon, strategy is a constant. The idea that the business model shouldn’t change every 12 months… but the execution part becomes a rolling consideration that, you know. And then the time horizons can be whatever you want them to be, but that’s just a rolling consideration versus the constant that sits above it. Because you wouldn’t want things like brand strategy, business model changing every day, you know?

Markus Menz: No. But the challenging part here is to ensure that the rolling part, that the operational part doesn’t run across, your long-term vision. And what I see, for example, very often in organizations is that they — in larger organizations — is that they have two different ways of doing strategy. The one is a classic strategic planning process or where they have, I don’t know, a three to five year planning horizon window or even longer than that depending on the industry. And then they have more, this… well, which I would, I shouldn’t say opportunistic, but which I would call maybe the more spontaneous strategy process. Which builds on very specific strategic initiatives that they launch depending on the opportunities that are arising. And, and they adept those initiatives relatively fast and those two processes are usually aligned. But of course you need to ensure that they stay aligned over the course of the development of the organization.

[min 10]

Ben Robinson: Those longer term strategic planning exercises… I think we could argue whether they’re becoming obsolete. But I mean, it seems very much the case that they still happening at least according to your research.

Markus Menz: Yeas, at least when it comes to larger organizations and also when I talk to startups for example, or fast growing businesses. What I see is that they typically, they have still a vision. I mean it’s not as explicitly formulated or articulated and yet they don’t have necessarily a dedicated strategic planning process, but the team has a clear idea of where to go and what to focus on. And on the other hand, they usually are very good because of the scarce resources, probably they’re very good in prioritizing short term activities. So in coming up with dedicated actions plans where they prioritize for example, as the top three priorities over the next couple of months or so. And that’s a different from very large corporations where you don’t have typically those very specific priorities defined at the top level.

Ben Robinson: But I guess that leads onto the, to the questions that I wanted to ask you, which is to what extent have those strategic planning exercises evolved? Because, clearly, you know, I guess if we go back 10 or 20 years that there would have been exercises that were carried out by a small number of executives. Independently the rest of the organization and they would, and the strategic objectives would have been passed top-down, right? Very much as a directive, this is what we’re going to, this is what the plan is for the next five years, three years, whatever the number, the horizon was… go and execute. Have you seen a shift towards a model that’s closer to the startup world that you’re talking about, there. Where more people are empowered to develop strategy more people are involved in the… Or, there’s a better connection between the people who execute the strategy and the people to formulate the strategy?

Markus Menz: There have been significant changes, I would say also in the mindset of top management, how to do strategy. And you can consider a number of dimensions, for example, you can consider, first of all, why do you do strategy? This has changed. I mean it was, very often in the past, it was considered something necessary. I mean, I still remember when I consulted 10 years ago a company, a medium sized company in Switzerland, that was asking me to develop a strategy with them. But basically it was a CEO, he just wanted to have a written document as kind of a justification of what they were doing. And so this mindset I think has changed. Meanwhile top management, I don’t know any company that doesn’t consider strategic choices as, as strategic priorities and formulating them as something unnecessary.

So it’s the opposite, they consider it quite important. And so as the question is, who is doing it and why? And the who, I mean, strategy has become much more inclusive. That’s what I see in, I mean, on average and in organizations. But particularly in, also in organizations where in the past you wouldn’t expect it from. So, large industrials for example, who do surveys of their employees who involve employees and strategy development exercises. So, it seems to me it has taken maybe two or three decades of ideas that originated from IBM. For example, how to involve people in idea generation… has finally spread across companies. And this is certainly supported by the startup movement we are seeing globally, that somehow infuses new ideas of who should be involved. And this doesn’t only include employees. It also includes customers, suppliers, all kinds of stakeholders that were previously not necessarily considered in strategy exercises. I mean, strategy was something done in the board room previously, but not involving everyone in the organization. And then the final aspect is the how to… the tools. So, was a tool set you would use and and there, I mean you would assume that there should be some more change there.

[min 15]

But from what I see the tools to do strategy, of course some tools do facilitate those interactions of stakeholders meanwhile. But there are not necessarily modern or novel strategy tools out there. So I see that very often companies are still relying on let’s say traditional, could also say old fashioned, strategy tools that were fine for a certain era of strategy. But that are not necessarily useful for today’s environment.

Ben Robinson: So, you’ve raised at least two points there that we want to drill down more into. The first one is really about the purpose of the strategy team. Has the purpose of the strategy team changed from one that was charged with coming up with the strategy and overseeing the execution of that strategy. To being one that coordinates the activities of a much larger group of stakeholders within the organization? And in answering that it would be helpful is if you could share some of your, some of the insights from the report that you published about the consequences and determinants of strategy function sites. So like are you seeing that basically in terms of how well staffed the strategy team is, for example.

Markus Menz: Yeah, I mean just start with, you refer to the central strategy function in organizations. And I would say that not necessarily the tasks or general activities of those strategy functions have changed a lot. Of course they include some of the more recent developments these days. For example, coordinating strategic initiatives across the organization, overseeing sometimes new business development, sometimes you’ll see that internal venture capital arms of, companies are under the umbrella of the strategy function. So those kinds of activities have changed, but the core of their activity is still relatively similar, which includes, well aspects referring to strategy development. And aspects referring to strategy execution. So on the development side, the basic activity has changed, I would say from organizing a formal strategic planning process every year to a more coordinative task. As you mentioned, to coordinate between top management and middle management or even further down in the organization, line employees, coordinating horizontally.

This is something which is very frequently overlooked, horizontally between functions in the organization. So for example, coordinating between marketing, procurement, supply chain management functions and coordinating internally versus externally. So, internal stakeholders for example, in product management and external stakeholders, customers that are relevant or key accounts of the organization. So, this has changed more on the, on the strategic planning side. It’s oftentimes, it’s still referred to as strategic planning, but it has become quite different, how it is being done. On the other hand, the execution side yeah, is these days more concerned with strategic initiatives. It still concerns a lot of, the activities regarding how to execute the decision, where to compete. For example, it includes decisions regarding mergers and acquisitions, divestitures, alliances that are under that umbrella. So those activities are still the same. But it has become a much more, I would say, much more coordinative function than it was before.

Ben Robinson: On the subjects of where to compete, do you still think that’s as relevant a question as it used to be? Because, if you subscribe to the basic notion of the world is moving much faster and also that with technology change in particular, the clear boundaries between one industry and other industry are getting blurred. So is it really the job of the strategy team to continue to make those kinds of bets about where to play? Or is it much more about making sure that the company is fit to play? So it has, by that we mean has an excellent product, has an excellent or optimized business model, and then has real organizational agility. Are they not the sort of competencies that are much more important than deciding making big bets on where to play?

[min 20]

Markus Menz: That’s a tough question. What I see is that at least when I look at the larger corporations, they still rely very much on questions of where to compete, of course those concern the overall firm’s business model. So if you, for example, take recent examples of large industrial conglomerates in Europe, take Siemens, headquartered in Munich and what they want to become as a digital company. They’re trying to reconsider the boundaries of their business divisions in order to develop this corporate, you could say this corporate business model. But I still think that the central strategy function is concerned and should be concerned with questions of the overall firm and not necessarily of the specific, let’s say product specific business models. But rather as a corporate business model so, why does it make sense to have the different products under one umbrella? Why does it make sense to be in certain geographic markets active? And of course, if the market boundaries are blurring, if the product boundaries are blurring because this has consequences for the decisions that they make. But there should still be concerned with those choices because otherwise no one is in the organization. I think they’re the only ones really asking those questions besides the top management, the central or group top management.

Ben Robinson: Another question on the strategic function within organization may or may not be changing… cause clearly as well as the speed of change accelerating… We’re also living in a world where we have an abundance of information. I mean it’s, I think the amount of data that a strategy team works with today versus 10 or 20 years ago, it’s exponentially larger. Is that helpful? Does that lead to more precise decision making or is it at a,in some ways a distraction do you think?

Markus Menz: Well, I think it should be helpful. It should to lead to better decisions, but does it do so…. that’s, that’s a question that I would, where I would be a bit worried….

The amount of data is there, the question is how to deal with that data. And what I also observe, and this is something that also colleagues frequently note and I sees the same when it comes to to data and information technology and organizations. Very often, I mean, it’s considered, as something that must be done, that must be considered. But the question in the beginning should be, why do we need a certain data? Why do we need certain technology? And this is something that is not necessarily being asked. So that’s one aspect, one facet here you could say. The other facet this, when I look at large organizations, multinationals, sometimes there are very smart strategists working in those organizations who see a need for, developing new technology that supports eventually how to do strategy.

But the need is not shared by everyone in top management. But this is about to change. What I see now is that the top management has started pushing those topics as well.

Ben Robinson: Is data helping them to make better informed decisions… Because there’s so much risk involved in making these choices. The more that you can couch those choices in terms of data and demonstrate that it’s a really well formulated, informed decision is great. But I guess on the flip side, the more that you rely on data that potentially the slower the decision making comes. So do you, is that where the trade off is? Is it between collecting the data to make an informed decision versus continuing to make very quick decisions that are required and in a fast moving environment?

Markus Menz: I don’t think that this is necessarily a trade off. I mean, it sounds to me like an excuse that executives probably oftentimes articulate. Because what I think is required is a suitable technology. And the same applies actually when I discuss, for example who to involve in a strategy process with company executives. What they typically say is, yeah, of course we would like to involve everyone but we don’t have the necessary resources. But of course you could rely on technology that facilitates this. And I think you should start thinking about what kind of technology is suitable to deal or manages this amount of data. I don’t think that there can be too much data.

Ben Robinson: Okay, cause I guess it was another way of formulating the question which is… surely there’s an optimal point of which, you know, with, once you’ve reached 80% level of conviction based on all the data you have. Then making a decision there is preferable to waiting for 100% of the data because otherwise you’re not first mover…

[min 25]

Markus Menz: I mean the challenge for me would be not so much about the data here, but about just about making the decision. And I have the impression that many organizations rely on these days, at least, on very good data. Of course we can always improve. I mean, but maybe they’re close to the 80% already. But when it comes to the decision, the data’s not necessarily considered and…

Ben Robinson: Got it, so you’re saying it just becomes an excuse for people who are indecisive in the first place?

Markus Menz: Yes. It could be. I mean, I’m a bit worried about taking a very rational view on strategy and I experienced and therefore I also shifted to, part of my research focus towards the individuals who actually do strategy. I experienced that… this is a very much, I mean, strategy is as much depending on the behavior of the individuals involved as it is on rational choices. And therefore, yeah, we should be careful to, only rely on data. But that’s my experience and view that I developed over the past couple of years.

Ben Robinson: When it comes to decision-making, with or without lots of data, organizations, strategy teams see as are still relying on a lot of, of these tools and models. Are these same models and matrices still relevant because clearly one of the things that we’ve seen is in this new era of kind of networks and ubiquitous computing…. That the nature of strategic advantage or competitive advantage is shifting from way more from being about supply side economies of scale to being about demand side economies of scale. But most of these tools still assume, right, that a company is optimizing its strategy and optimizing its chances of success, based on internal resources and the resources that it could acquire or hire, right? So, do you think the strategy profession has adequately adapted its tooling for this kind of new modern world of networks effects?

Markus Menz: Well, let me start with a relatively mean saying, a fool with a tool is still a fool. And I think it’s not so much about the tools. The tools may facilitate a certain discussions. They may visualize certain analysis, but they’re not certainly not as the most important aspect. So, that’s just to start with. I do believe however, that those tools may be valuable if applied correctly and correctly. I mean, first of all, that you need to consider whether the underlying assumptions of those tools are still applicable or still relevant. And for example, if you take Porter’s Five Forces framework, where you try to understand the competitive forces in an industry, and potential and the threat of of potential new entrants and what you could do about it, the underlying assumption here is that you can clearly define an industry, right?

But the industry boundaries have become much more blurred these days. So there you would see an example where it’s probably difficult to apply the same tool and in the same forms these days. Another example is BCG portfolio metrics, um, where you try to map your businesses or you could say products. You could also do it with geographic markets, along two dimensions. One is market growth and the other one is a relative competitive position. And what you try to do is to get an overview of the activities of the organization. And I think this can be still relevant if you find the right criteria to define your markets, to define your products. And for example, Google is still working of that metrics. So, even a company that is considered for being at the forefront of the technology firms, one of the leading firms there is applying one of those more traditional, tools.

On the other hand you are referring to the more demand-side oriented tools. I strongly believe that there need to be more novel tools. But of course to come up with those tools requires also, at least from an academic perspective, it requires some data about the underlying assumptions about the firms or organizations that you consider. I mean, take for example, Porter’s Five forces, this was developed an industrial enterprise in the 1970s, 80s. So, we don’t necessarily have the data yet to develop those solutions. We have started doing it, but…

[min 30]

Ben Robinson: I think for me the Porter’s framework works very well for an established business. You know, like you’re relatively well established. What are the levers you could use to make this business perform better? What are the potential threats coming? I still think all of those things are relevant as long as they’re applied to an arena of activity rather than a very narrowly defined market. But I think the question is more if, you know if we believe that network effects are of much greater importance than they were historically. What strategic theory is there for example, that tells a company you should maximize the number of users because that will trigger, make way more value for the ecosystem and will enable you to become much more to deliver much more, much more value over the long term. Most models or matrices would probably want you to become as profitable as you could as quickly as possible, which would be in conflict probably with that aim of maximizing the number of users, for example?

Markus Menz: It could be in a way, I mean, you’re referring more to the tension between.

Ben Robinson: Tensions was what I was looking for, yeah.

Markus Menz: The tension between exploratory activities and maybe exploitative activity. So efficiency versus a growth for example. And efficiency, I mean, yeah, many of those tools are definitely targeted towards improving efficiency of organizations. Whereas relatively few are referring more to the growth ideas. I mean the Ansoff matrix you mentioned refers to it, the Portfolio Matrix does partly.

Ben Robinson: The problem with the Ansoff matrix is that for me there’s, this sort of implicitly assumes mass markets, you know. This idea that you could just take a product and introduce it to another mass market or, that’s what’s problematic about that. But, okay, I think you’re right. I think, you’ve kind of redrawn the question or you reframed it… About exploitation versus innovation and that’s cause I think that kind of takes this to the second section they want to talk about, which was organizational design. Because there are many ways in which to frame this question of organizational design. One might be, how do you ensure consistency and control versus autonomy and agility. But I agree with you, another one might be how do you ensure that you get maximum exploitation? Maximum efficiency at the same time as you would allow the organization to continue to innovate and you don’t become subject to threats from much more innovative players in your market. So with those two kind of, those two trade offs in mind, how do you, what what are your biggest learnings in terms of organizational design?

Markus Menz: Let me reply to your first trade off autonomy versus control, which is, let’s say one of the very classic trade-offs. Similar to this is also the classic distinction between differentiation and integration. So, you would associate autonomy with increasing differentiation whereas control with more coherent integration of the activities in an organization. Autonomy versus control is, as you mentioned alone, a huge topic and of course you can, you can think about all kinds of structural or procedural solutions that aim at resolving it. I mean, for example, you could argue that there, that you have a core business where you need to infuse more control. Whereas you have more let’s say more innovative businesses where you would like to have more autonomy and lead them separately.

If I really reflect on this and I don’t think that companies should necessarily strive for control. They should, based on what I see these days. They should strive for keeping people in the organization, teams in the organization as much autonomous as possible. And infuse control only were absolutely necessary. I think that’s true in a very general way.

And how do you achieve this? Well, of course, if you think about an organization with hundreds of thousands of employees. A huge enterprise, it’s very difficult to achieve this, solely by infusing a certain formal, organizational structure. What you need, at least to me are three things based, I mean, again, very general things. But as a starting point to think about it. The first one is culture.

You need to have a culture that allows this autonomy. That allows employees making their choices, that allows teams or units, think about a remote subsidiary… that allows a subsidiary to take choices. And without asking or getting back to headquarters.

Ben Robinson: And I guess the culture also allows for mistakes, right? Because if it’s a much more experimental world, we live in.

Markus Menz: Exactly that would be another aspect of culture. I mean you need to be open to those mistakes.

[min 35]

The second aspect that it requires, and this is closely related is the leadership. And with leadership, I mean that you have a certain leadership style in the organizations that you have a certain development of leaders in the organizations. That you have a certain characteristics towards leaders when you recruit people. And we know to look at highly successful organizations, what they care most about, I mean it is about how people are led. Again, I can only refer to Google here who became quite famous for developing, based on a huge amount of data, guidelines how people should be managed and, let an the firm. And it’s just one example of leadership

And the third aspect, it is about the people in the organization. And here, I mean not only who you have in the organization. But it is about how do you empower the people. I mean, you cannot provide autonomy to everyone without maybe educating or empowering the people to use this autonomy in a meaningful way. And, therefore I strongly believe in order to have an organization that functions well, that wants to benefit from autonomy, you need to invest in the people who are working with this autonomy.

I experienced myself in organizations when I talk to executives, when I advise to organizations or educated executives in organizations. That sometimes the people in those organizations didn’t want to have more autonomy because they had some fears. They had some reluctance that this would be something valuable for them. So you need to make sure that they have the skills and the ideas, how to use this autonomy.

Ben Robinson: A slightly more provocative question. Does this all need to still be organized within the structure of a firm? If we get back to a text you probably teach undergraduates, you know, Ronald Coase’s nature of the firm. And he argues that firm is necessary because of very high transaction costs. Therefore, it makes sense to coordinate the activities of people within a firm. Because otherwise, you know, they cost so much time and so much money each time to try to coordinate this if these people weren’t under some sort of common control and common management. Is that still the case or is that an antiquated notion?

Markus Menz: You already provided part of the answer, right? So, there are certain conditions these days in the environment that have changed compared to the times when Coase came up with his seminal ideas. And I mean, the question is, yes it is about transaction costs. It is about should we organize activities within a hierarchy? Is the market more efficient to do so? And I think what happened in the second half of the 20th century, there was a relatively strong movement towards hierarchies. Meaning, firms, corporations …whereas these days you see somehow a different development. You see that markets are becoming more and more important again. Take for example, labor markets outside of companies. Take for example companies that offer a workforce for certain projects, that, for example, allow you to recruit temporary management capabilities.

So, those are all examples that show you that there has been a shift more towards markets these days. And one of the reasons why it’s possible to, in economic terms at least, to have this shift is that the transaction costs have shifted. And it has become a much easier to communicate. It has become much cheaper also to travel maybe than it used to be. And all those kind of things have changed and the result is, and that’s what we see also in our research is.

[min 40]

The boundaries of organizations have blurred and have become less clear. So, and there are a number of trends associated with it. I mean think about open innovation. I mean this is something where you involve customers for example, in your innovation processes. I mean, this requires that there is some communication at it. It involves a blurring of the boundary of the firm, think about a temporary staff that you hire for, for certain priorities, peaks for example. I mean this is something that requires, a relatively weak boundary between the organization and the market. So, so definitely I think organizations have changed. Do we still see a firm? I think yes, firms will still be relevant, but they will changeMaybe the core of such a legal entity would be relatively small in the future and there will be a subset and network of, other legal entities surroundings this one. And supporting this one in an ecosystem, how it’s referred to today.

Ben Robinson: Do you see examples of companies that break themselves up into much more cellular structure… maybe to make themselves more agile, maybe also, to make them easier to work with a network that dissolve the groups themselves into smaller units.

Markus Menz: It’s actually a quite fascinating question, on the one hand, I mean, what you can observe these days is firms, organizations that have a size that never existed before. I mean, when you look at the largest companies these days, how huge those companies are on the one hand. So you see those giant firms on the one hand. On the other hand you see ways of new ways of organizing internally to make it possible to manage those giant firms. And one of the aspects is actually is this modularization you could say, or is it that dispersion of activities in order to benefit from unique aspects at different locations and different areas?

Yeah, and what we did, we studied specifically the dispersion of headquarters internationally and we were concerned what was the question of why do companies actually split up their headquarters and decide to have a dual headquarters? So two locations for the headquarter activities on more than two locations. So, we refer to it as dispersed headquarters. You could also say virtual headquarters. What we were not concerned with was a question of where’s they set up regional headquarters or not. Because our definition of dispersed headquarters is differently. We are not saying that they need to be necessarily regional headquarters. But we say that their central functions that benefit from unique aspects in certain locations, for example, that you have your legal entity, as a corporation, as a multinational based in Geneva.

Then you have your, maybe your finance function based in London split it also too to New York because you want to be close to your external stakeholders to capital markets.

And you have maybe your central it function you have spread around the world with a very large center of excellence maybe in Bangalore. So that’s one way of thinking about it and what we explored is why our companies are doing it. And we observed, for example, that already, and we relied on historical data here from colleagues and we observed that already in the late 1990s, 50% of the companies in our sample, it was a sample that covered Germany’s and Netherlands the UK and US. That 50% of those companies had dispersed headquarters so, more than just one location for their headquarters, even though it was referred to as a corporate headquarter.

And we explored why they are doing it and found that the strategy is decisive of that they have and besides that also the way how they interact with their businesses and functions in the organization is decisive. So whether they have a more, a central or a more decentralized approach towards managing the functions in the organization. At the same time we heard that, we asked ourselves is this a good thing or not? And we discovered it’s not necessarily a positive thing for companies to disperse those activities. I mean, it may pay off in the long run, but we also saw that it decreases the cost effectiveness of the headquarters.

[min 45]

So it increases the costs that you have because I mean, it’s again, a trade off. Should you co-locate activities at one location or should you disperse activities.

Ben Robinson: Because you might get some cluster effects and, yeah.

Markus Menz: Yeah. And do you have communication costs between the various units, think about the finance functions that you split between New York and London. And that has to coordinate with a legal entity in Geneva, then it involves quite some coordination costs here.

Ben Robinson: Just so, I want to move cause we don’t have long left. So, I want to move on to the topic of how education itself is changing. But just one last question. What’s the aspect of strategy that you’d like most like to debunk, or the, or a certain dogma that you think should be debunked.

Markus Menz: That’s a very tough question. Again, what I consider really annoying is the questioning of strategy itself.

Ben Robinson: Yep. Which always comes up, yes, “is strategy dead?”

Markus Menz: Yes, exactly and that’s, that’s something that I really don’t understand and don’t see because the essence of strategy is, as I said in the beginning of the podcast where it is about making choices for a certain time horizon in order to be able to develop an organization, a company in a certain direction. And I think this is necessary for all organizations that you cannot deny the importance of a good strategy. Of course, what a good strategy is then can be debated. But the existence or the need for strategy shouldn’t be debated at all.

Ben Robinson: Would you argue that strategy has become more or less important with everything that we’ve talked about?

Markus Menz: Well, certainly not less important. So, to me, strategy is something that is more relevant than ever. And if you think about, I mean, if you assume, and I’m saying assume because we don’t have much evidence yet. If you assume that there is a high of volatility in the market, if you assume that there’s more unpredictable development going on, if you assume that the workforce has changed, people are becoming more mobile of different preferences. If you assume this, I think strategy has become much more important these days…

Ben Robinson: I am inclined to agree. And then what’s the best way to teach strategy? So, I ask that I guess with two concepts in mind, the first one is, does it make sense to teach strategy in the abstract? Is it more important to teach strategy in a more practical sense than it was potentially in the past? And then the second part is, does it make sense for people to go to university for three years to learn strategy? Or is there a way in which we can educate people faster in a way that’s more liquid, more fluid and doesn’t involve them coming to a physical location every day for lectures?

Markus Menz: That’s a risky question for me because there’s clearly still a disconnect between how we are currently teaching strategy and how it should be taught ideally. In my ideal understanding at least, referring to the first aspect of your question, I don’t think, that strategy should be taught in an abstract way. And I also think that this is not the case anymore at most businesses… Of course you need to understand the theoretical foundations of the core concepts. And it’s still important to know what economies of scale are. It’s still important to, as it is, for example, to know what network effects are and how a networked economies work. But it is still relevant to understand those theoretical underpinnings. It’s still relevant to know the various concepts and frameworks and tools, but it is as important to be able to apply those tools…

Markus Menz: And just to give you an example of what we are doing is, we let students in the first year of their undergrads and not just learn those management tools, or strategy tools. But they also have to come up with business plans, with ideas for concrete businesses where they use those tools for and develop something based on the analysis building on those tools. That’s just one example. Or another example. I’ve worked with companies where we designed executive education management development programs. And there we usually have a mix. A blend of some input from myself on the various tools, recent developments as well as we have, a lot of group work on concrete projects that they will be pursuing later on in their organizations. So that’s something that, where we incorporate the actual doing of strategy, in how we teach strategy.

[min 50]

Markus Menz: The second aspect refers to the classroom setting. I mean, it’s still think it’s necessary to have it … when you consider a program on management and business administration that it’s three years that are necessary. For strategy alone, I wouldn’t see such a huge amount of time. What we do see at the same time, more on an executive education level is that there’s increasing demand for shorter executive education rather than the classic executive MBA or full time MBA programs. So we do see that, executives, aspiring executives, that they are looking more towards topic oriented, short term programs, like a three to four day programs or a regular online interventions where they can learn on specific topics.

For example, think about a program that develops aspiring board members in the area of digital topics. So, that will be a more specific education rather than a fully-fledged executive MBA program.

Ben Robinson: So, and it was unfair of me to position that as “either…or” because I knew, okay, there’s a lot of blended classroom and online learning and so on. Online learning does, is that as effective as classroom teaching in your experience?

Markus Menz: I mean, there are pros and cons when it comes to those two formats, I experienced myself that online learning can be quite effective particularly as it allows participants to or students to reflect more. To digest of the information and material in greater depth as it is the case with, or sometimes the case at least with in-class formats.

What I also experienced is, and I did this myself a couple of times, direct interaction can be very valuable when applied in an online format, which is not as feasible in an in-class format. So there are advantages of online learning, of course, there are also disadvantages. Students frequently mentioned the difficulty of having an engaging class discussion online. Of course, it is possible with today’s technology. But on the other hand, it’s very difficult to convey a certain spirit or atmosphere through online communication tools.

Ben Robinson: And do you believe that the institutions like yours are adapting quick enough? Or do you believe you are also at risk of some sort of Clayton Christensen type disruption?

Markus Menz: Hopefully we are, I’m confident because I see some relevance of an institution like ours. If you take the University of Geneva as a whole or the business school, the Geneva School of Economics and Management specifically… I think, there are certain facets of an institution like ours that make us unique, compared for example to a standardized online offering or even compared to another private business school. And this is of course, first of all it is a stimulating environment in which we are in. I mean, it’s not only about faculty educating, or teaching students. It is about interactions between students. It is about interactions between students and alumni for example, and the university serves as, as a facilitator of those interactions. And those are live interactions in person. And I think those are still the interactions that matter more than, than just as the online,or virtual interactions.

And secondly, I think we have a dedicated faculty that is very well known globally for their rigorous research. And so we not just teach or convene knowledge, but we also create knowledge. So we try to come up with insights that are unique and at the forefront of our fields. And we try to use this knowledge also to lead our teaching. And I think this is also something that prevents us from becoming irrelevant, as, as some colleagues claims these days.

[min 55]

Ben Robinson: So I’m going to ask you the same question again, but just about academia, is there an aspect of academia that you find really frustrating? That you would like to jettison or some aspect of academia that you find overly formalized that you’d like to do away with? For example, the nature of academic texts. What you said is very interesting, the way you said it’s very inaccessible to the lay person…

Markus Menz: That’s again, a very tough, but also to me, very interesting question. I mean, you could also rephrase the question and ask what will be the one thing you would like to change about about your profession? And I think personally if I think about academia and management specifically, not, I’m not speaking about other disciplines that I’m not that familiar with. But at about management as an academic discipline, you could also sometimes include economics here. But, but management in general, I would say there has been an increasing divide between between the academic world, and the world that some refer to as the real world. The world of practice and of those two to whom academics should actually contribute to. And the difficulty here is that some of my colleagues, I’m not saying all of my colleagues. But some of my colleagues clearly focus on their research on their fundamental research without considering its relevance.

And that’s to me relatively risky because I think we are serving one purpose and does this is improving how organizations work. How organizations are being led, being managed as these days, and if we are not concerned at all with the relevance of the questions, which can be very specific tiny questions. That are not necessarily important for the executive running those organizations. This is a huge risk because there is a risk of a further disconnect between academia and the questions that are being studied and the questions that matter for executives, and managers in the real world.

Ben Robinson: Should it be easier for business people to become academics? In this field, in particular, it’s one where if expertise comes from being a practitioner, then it would be good to blur the lines between practitioner and educator…

Markus Menz: Yes, exactly, it would be, it would be great if there would be a greater collaboration for example, or greater interaction. Just to give you an example, I mean I usually get my research questions that I study from conversations with practitioners or from newspapers, articles in and the Wall Street jJurnal, the Financial Times or wherever. So I see certain phenomenon going on and I then think myself, okay, how can I understand those phenomena better? But I also have many, many colleagues who look into the academic body of literature and ask themselves,  and that’s a starting point. How can I contribute to this academic conversation without necessarily considering that this conversation is, is actually something that is currently relevant for organizations.

And but of course, coming back to your question, I mean, is it needs to be closely collaboration for sure. There needs to be more interaction and maybe also more diverse backgrounds of academics working on, or studying those topics, the most fascinating studies that I oftentimes see from colleagues are those of colleagues who had a different career before they actually entered the academic profession. Yet it is quite difficult to make this career change, but this is something that is clearly enriching this conversation.

Ben Robinson: Okay. Just before we leave, so we’re gonna tweet out the links to some of the research, some of your research that we’ve alluded to during the conversation. Anything in particularly like you’d like to highlight to our audience, anything any blogs or journals or anything that you think for those people who’s super interested in strategy they might want to look into?

Markus Menz: Yeah, I still think that some of the more classic practitioner oriented outlets like Harvard Business Review, Sloan Management Review or even the McKinsey Quarterly are, are still very valuable sources for getting an overview on a specific topic or a specific aspect. I would also recommend your audience to get directly in touch with academics if they’re interested in certain topic areas.

[min 60]

I mean, they see oftentimes, for example what kind of areas of expertise in academic have on their web pages. And, and simply reaching out to them it doesn’t cost anything and it oftentimes provides them with some valuable input. And academics are usually, very open to share their insights and learnings on a specific topic. So, that would be an advice that I would, like to share here.

Ben Robinson: And if, if anybody wants to contact you, how do they do so?

Markus Menz: Well, the topics that I’m focusing on are these days primarily corporate strategy, still topics referring to corporate headquarters, centralization, decentralization and the organization of top management teams, and boards of directors. So, corporate governance questions as well and one question that I would like to particularly highlight that I’m currently concerned with is understanding how to do strategy in a way that keeps up with the modern development, both in terms of changes in the environment, but also keeping in mind technology, that builds on and copes with this complexity, but on the other side simplifies doing strategy. And if you have examples regarding that, I would be very happy to learn about them and to discuss with you, how to maybe generalize and further improve those strategy processes.

Ben Robinson: And if they, if they do, they should reach out to you through LinkedIn or your email.

Markus Menz: Yes, I’m fairly active on LinkedIn and I do have an email address…

Ben Robinson: Great, Markus, thank you very much indeed. I think if I were to conclude, it would be that the nature of strategy, both in the way that it’s taught and the way it’s executed are changing. But strategy is more relevant than ever. So Markus, thank you very much for your time.

Markus Menz: Thank you very much for having me. Ben.