We hear a lot today about the need for companies to be more agile in response to the current environment, sometimes characterized as VUCA—volatile, uncertain, complex and ambiguous. But it seems many businesses are struggling to create agility outside the organization’s boundaries. Would you agree with this?
I would. In recent years, businesses have devoted a lot of attention to making their supply chains more resilient, more agile. Supply chain innovation has been well researched, tested and systematized. But we have yet to see this systematic approach applied to external relationships, to the way a company interacts with the outside world.
So the way businesses think of their “outside world” needs to change?
Exactly. We need to look beyond the supply chain, and consider the ecosystem at large. In a way, the whole world is a portfolio of potentially available resources and assets. Looking forward, the companies that win are going to be the ones that are the most creative in harnessing and leveraging the skills and talents of interested outsiders.
What are some of the challenges in achieving this change of mindset?
A lot has to do with the way organizations are designed. Most companies follow a pyramid structure. So leaders are, by default, often rather insulated from the outside world. They do not engage with consumers or suppliers in the same way that front-line employees do.
But there is also a cultural issue. Leaders typically have a lot of their emotional capital invested in the past. They feel compelled to justify legacy decisions that may no longer be serving the organization’s best interests. This creates a sort of path-dependency in which ideas that challenge the current success formula are ignored. That’s why it typically takes a performance crisis to prompt deep change; only then will senior executives begin to challenge their long-held assumptions.
But leaders seem to be constantly exchanging ideas with other executives. CEOs often attend summits, conferences, social events. Aren’t they exposed to new ideas on such occasions?
If you think about it, leaders are open to a very narrow set of inputs. They usually attend conferences within their own sector. They talk mostly to industry peers who share their worldview. Few leaders, in my experience, work systematically to learn from other industries. Nor do they spend much time talking to potential customers that fall outside the company’s current definition of “served market.”
The future—of art, fashion, entertainment and business—usually starts out on the fringe, not in the mainstream. To intercept the future, a leader has to invest in learning from the edges. What’s changing in lifestyles, demographics, technology and geopolitics that most of my competitors are not paying attention to? When you go to a conference, think about what’s not on the agenda.
In a way, it’s simple. You can’t create outlier financial results without an outlier strategy; and you can’t build an outlier strategy unless you learn from the outliers—both within your organization and without.
Today industry boundaries are blurring, sectors are merging into hybrid spaces and the role of producers and consumers is often reversed. In this context of convergence, it seems companies must engage beyond their own walls as a matter of survival. But this does not come without its own challenges. There is a lot of “noise” out there. How can companies better distinguish the signal from the noise?
Finding the gold nuggets buried in all the irrelevant glitter is never easy. However, technology is increasingly providing us with the means to gather and filter an amount of data and information that was previously unconceivable. Analytics, as you know at Accenture, are key to helping businesses track what matters. I know of a large retailer that introduced a system that encourages and allows employees to share customer feedback in real time. During the first week of implementation, this system captured several thousand customer insights. With such a breadth of information, companies can use analytics to rapidly highlight critical opportunities and trends.
How does size influence a company’s ability to gather outside signals and in general to engage with external stakeholders?
It’s not really a problem of size per se, rather of architectural design. Organizations are, at their essence, political systems. As with governments, there are radically different ways of allocating political power—and some are more efficient than others.
Most corporations are more like the Soviet Union than a constitutional democracy. They are complex, centralized bureaucracies. The problem is that to survive in a hyperkinetic environment, they need to be run a lot more like markets.
In the long-run, markets out-perform hierarchies. Over the last 50 years, for example, the New York Stock Exchange has out-performed every one of its constituent companies. Why? Because markets are apolitical—when, as an individual investor, you decide to sell shares in Google and buy shares in Twitter, let’s say, no one can second-guess your decision.
And you don’t have an emotional stake in the past. You don’t worry about cannibalizing your core business, or protecting your installed base, or making sure you don’t compete with your channel partners.
In most companies, by contrast, resource allocation is a highly political process. Those close to the top, the ones who are running legacy business, have a built-in advantage in competing for scarce resources. They have the power and the connections to win a disproportionate share of resources in the budgeting wrangle. Also, in most companies, there is only one source of funding for new ideas—there aren’t dozens, or hundreds of angel investors, as you’d find in Silicon Valley. Given this, it’s hardly surprisingly that incumbent companies often over-invest in the past and under-invest in the future.
The question is, how can we re-engineer management models so they are based on market principles? One approach we’re taking is to run global “hackathons” (www.hackmanagement.com) where we crowd-source the problem of reinventing management. In a recent effort, we had more than 1,700 human resource leaders from around the world hacking the HR function with the goal of making their organizations more resilient.
This idea about the tension between exploitation and adaptation is one we have already come across in both the management and literature and conversations with experts.
Yes, there are inherent tensions between scale and agility, efficiency and innovation, discipline and empowerment, and between being open to the outside world and protecting proprietary advantages. Yet in most companies, these tensions aren’t very well managed. Scale, efficiency and discipline usually trump agility, innovation and empowerment.
The tendency to centralize is another significant impediment to adaptability. Monolithic things aren’t adaptable. Most organizations are too much like elephants—big, but also ponderous. By contrast, think of an ant colony, which is made up of many autonomous units. It can re-arrange its structure to meet external changes almost immediately.
Big corporations are like elephants. As they grow bigger, they typically take resources away from innovation and experimentation and invest them in developing internal capabilities. As the organization gets bigger, more and more of its energy goes into managing its own complexity.
The idea of having a dedicated “exploratory unit” has been discussed in some of our conversations with experts. Do you think that establishing a sort of “external outreach entity” provides a good solution for large businesses to maintain some of the advantages of small and nimble start-ups?
I understand the logic behind it, but there are some risks associated with the notion of a venture unit. If something is perceived as separate from the core business, it can end up being marginalized, especially at times of budget pressures. In my experience, most new business incubators end up as orphanages filled with unloved and under-supported ideas.
It doesn’t have to be this way, but it takes a lot of work to ensure that senior leaders feely personally responsible for mentoring new businesses.
So what would a more appropriate solution be?
Think of innovation as an engine: you have to assemble a lot of individual components to get an engine to work. A water pump without pistons isn’t worth much, or a turbocharger without a transmission. In most companies, the innovation engine is still missing some very important components.
For example, very few companies have trained every associate in the art and science of business innovation—they haven’t invested systematically in building the creative capital of their own employees. Few companies have a comprehensive set of innovation metrics that tie executive compensation to the firm’s overall innovation performance. Also, rare is a company that provides employees with easy access to experimental capital. You can build an idea wiki, create a new venture fund, and celebrate successful innovators, but unless you take a systemic approach to making innovation a deeply embedded capability, your innovation engine will never really start.
At its essence, this means being curious about the outside world—and investing time to understand it.
What are the changing needs of customers? What are the external trends that are gaining momentum? What are the lessons we can learn from other industries? Openness is the first prerequisite for innovation.
Can you think of any examples of companies that are strategically agile?
Not really. I think there is still a lot for organizations to learn in this sense. If we want to invent the future of management, we need to be learning from complex, adaptive systems. What can we learn about resilience from biological systems, from cities, markets and even religious institutions?
Think of the role that cultural diversity and multi-ethnicity have played in London’s ascendency as the world’s most vibrant city. Diversity is the catalyst for renewal and adaptability. Many organizations try to honor this principle, by promoting diversity in their HR policies and training employees about diversity at work. But there is a whole lot more that organizations can learn from those things in our world that are highly resilient.
Silicon Valley offers a good example. Silicon Valley is a dense social network of very diverse individuals, and most of the innovation that comes out of that part of California is the result of unscripted, serendipitous encounters. Silicon Valley is also a market—or rather, three markets—a market for ideas, for talent and for experimental capital. Resources rapidly flow towards new and promising ideas, and away from tired or unproductive ideas. This combination of diversity and flexible markets is what makes Silicon Valley a hotbed of innovation. If you want to build a truly resilient enterprise, you have to start with these principles.
What is the greatest obstacle for companies that want to become adaptable at their core?
Incumbents often use their power to fend off the need to adapt, for example, by working to skew the regulatory environment in ways that make it difficult for newcomers to compete. I think the average CEO needs to spend less time lobbying regulators and arm-twisting regulators, and put more energy into embedding the principles of adaptability in every management system and process. When a company’s lawyers and lobbyists are the last defense against irrelevance, irrelevance has already won.
There is a social cost as well, when organizations fail to adapt. Jobs get lost, industries are abandoned, skills atrophy, productivity lags, consumers lose out. Actually, it would be interesting to do a study on the price that society pays for the non-adaptability of industry incumbents— and for the hurdles they put up in the way of new entrants. I’m thinking about the car industry in Detroit, or retail banking in the United Kingdom, for example.
Thank you, Gary. This has been a very thought-provoking interview. We will keep you posted on our research as it evolves.
Thank you for contacting me. You are researching an essential area and I look forward to hearing more about your research.
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