Outrunning Change—the CliffsNotes Version

Posted by Gary Hamel on October 21, 2009

I don’t know if I’ll write another book. Truth is, I’m too busy right now—and even if I found the time to churn one out, you’d probably be too busy to read it. After all, how many business books have you managed to read this year, cover to cover? According to my friends at Harvard Business School publishing, about 22 million business books were sold in 2008. If we assume the market for such books comprises 20% of the US population, or 62 million people, that means that each potential customer bought roughly 1/3 of a book last year. There are roughly 2,000 business books published each year, so the probability that you would buy my new book is roughly .35/2000 or .0175%, and the chance you’ll actually read it a fraction of that. So why bother?

I’m looking at my own bookshelf. It’s not huge. I’m not one of those professors whose office is encased floor-to-ceiling with books. By the way, I think academics do this to intimidate their visitors. The message: See all these books? I’ve read every last one and that makes me so much smarter than you. Nonsense! Eggheads don’t have time to read a lot of books, either. I doubt I’ve read more than 10% of the 500+ books in my office. I get sent a lot of books, and every few months I clear out all the books I know I’m never going to read and donate them to the local library—I’m sure there’s someone out there who is dying to read “The Five Dysfunctions of a Team.”

Not that my temporary vow of book-writing abstinence is likely to rob you of any incisive insights. Truth is, the average business book is just a Harvard Business Review article with extra examples, and the average HBR article is a good PowerPoint presentation with extra prose. So I figured I could cut to the chase and just give you the CliffsNotes version of my never-to-be-published book.

There’s probably no organizational attribute that’s more important today than adaptability. In our topsy turvy world, every organization is teetering on the brink of irrelevance, and unless it can change as fast as change itself, it will soon tumble off the ledge.

In contrast to market share or product differentiation, adaptability is an abstract concept. So let me take a moment to explain why it matters. What, exactly, would be the pay-off if your organization was a lot more nimble than it is right now?

First, it would be less likely to experience a prolonged earnings slump, of the sort that could knock 50% or 75% off its share price. A dramatic slide in a company’s market value is typically the product of a failure to adapt to the inevitable maturation of a once vital business model or preempt a new and unorthodox competitor. An adaptable company rethinks its strategy without having to walk through the valley-of-the-shadow-of-death; it reinvents itself before getting mugged by the future. As a result, it experiences fewer financial reversals. Investors like companies that deliver stable earnings and penalize those that don’t—reason enough to care about adaptability, but there’s more.

An adaptable company is one that captures more than its fair share of new opportunities. It’s always redefining its “core business” in ways that open up new avenues for growth. If it had been more adaptable, Best Buy might have seen the opportunity for mail order DVDs and beat Netflix to the punch, Coca-Cola might have grabbed the lead in the sports drink business from Gatorade, and General Motors, rather than Toyota, might have the world’s best selling hybrids. An adaptable company is always reinventing itself, always pioneering new markets. This malleability gives it a P/E premium relative to its less dexterous peers.

An enterprise that is constantly exploring new horizons is likely to have a competitive advantage in attracting and retaining talent. When a once successful company runs aground and starts to list, its most talented employees usually don’t stick around to bail water, they jump ship. A dynamic company will have employees who are more engaged, more excited to show up to work every day, and thus more productive.

And finally, an adaptable company will be proactive in responding to emerging customer needs and will take the lead in redefining customer expectations in positive ways (think of Apple’s pioneering retail stores or its top-rated technical support). The result: higher levels of customer loyalty and better margins.

Adaptability didn’t rate very highly as a design criteria when those early pioneers set out to invent Management 1.0 a hundred years ago. But it’s essential now, and if I was going to write a book on how to build a highly adaptable company (which I’m not), this is what it would say.

Chapter 1: Anticipation.

It’s hard to out-run the future if you don’t see it coming.

A. Face up to strategy decay. Like people, strategies get old and die—and in recent years, strategy life cycles have been shrinking. Great strategies get copied (“strategic convergence”); they reach their natural limits (as markets saturate and inefficiencies become harder to find); they get supplanted by better strategies (that are more effective at delivering customer value); or they get eviscerated, when well-informed customers use their knowledge to slash away at margins. Sooner or later, every strategy dies, and the signs of advancing age are always visible—if you’re looking for them.

B. Learn from the fringe. What’s true for music, fashion and the arts is true for business as well: the future starts on the fringe (not in the mainstream). As William Gibson once said, “The future has already happened, it’s just unequally distributed.” To see it coming, managers have to pay attention to nascent technologies, unconventional competitors and un-served customer groups. A good rule of thumb: spend an hour a day, or a couple of days a month, exploring emerging trends in technology, lifestyles, regulation and venture capital funding. The future will sneak up on you unless you go out looking for it.

C. Rehearse alternate futures. It’s not enough to spot trends, you have to think through their implications and how they’ll interact—and then develop contingency plans appropriate to each scenario. The more time a company devotes to rehearsing alternate futures, the quicker it will be able to react when one particular future begins to unfold. “Hey, we’ve already seen this movie and we know what comes next, so let’s get moving.”

Chapter 2: Intellectual Flexibility.

To change an organization you must first change minds.

A. Regard every belief as a hypothesis. The biggest barriers to strategic renewal are almost always top management’s unexamined beliefs. Music can only be sold on shiny discs? Don’t bet on it. The news has to be delivered on a big piece of flimsy paper? Not necessarily. You have to load programs onto your computer before you can use them? Maybe not. In an age of unprecedented change, it’s important to regard everything you believe about your company’s business model, its competitors and its customers as mere hypotheses, forever open to disconfirmation. Every industry works the way it does until it doesn’t; and if you don’t challenge industry dogma, you can be sure that some unconventional upstart will. So now more than ever, humility is a virtue.

B. Invest in genetic diversity. What’s true in nature is true in business—a lack of diversity limits the ability of a species to adapt and change. Problem is, the gene pool at the top of many companies is a stagnant pond. The executive committee is usually comprised of long serving veterans whose experiences and attitudes are more alike than different. Homogeneity has its virtues—it facilitates communication and speeds decision-making—but it also limits a company’s ability respond to unconventional threats and opportunities.

C. Encourage debate and dialectic thinking. Diversity is of little value if senior executives value conformance and alignment above all else. One of the reasons that McKinsey & Company* has remained at the top of the consulting game for so many decades is that it encourages internal dissent. It believes that vigorous debate improves the quality of decisions. Within any organization, it’s usually the malcontents and rebels who are the first to sense the impending demise of a much-loved business model, and the first see the value in wacky, new ideas. Yet these folks are often muzzled rather than encouraged to speak up. On every important issue managers need to ask their colleagues, “Where do I have this wrong? How do you see this differently? What would you do here?” These questions, asked repeatedly and honestly, can protect a company from the arrogance and nostalgia that so often stymies renewal.

Chapter 3: Strategic Variety

To give up the bird in the hand you must first see a flock in the bush.

A. Build a portfolio of new strategic options. Without a lot of exciting new options, managers will inevitably opt for more of the same. That’s why renewal depends on a company’s ability to generate and test hundreds of new strategic options. There’s a power law here: Out of 1,000 crazy ideas, only 100 will merit serious consideration. Of those, only 10 will be worth a serious investment, and out of that modest bundle, only 1 or 2 will have the power to transform a business or spawn a new one. Google gets this. Within its core search business, the company tests more than 5,000 software changes a year, and implements around 500—this according to BusinessWeek. The fact that Google has thus far managed to maintain its overwhelming lead in online search is in large part the result of this blistering pace of innovation. In the end, the pace at which Google, or any other company, is able to adapt and evolve is a function of the number of new strategic options that it is able to generate and test.

B. Build a magnet for great ideas. In the quest to expand the option set, it’s important to cast the innovation net as broadly as possible. IBM did this in 2006 when it hosted a worldwide Innovation Jam. The online conversation was designed to help IBM identify new ways of using its resources to help address some of the world’s toughest challenges. More than 150,000 experts, vendors, employees and clients participated in two 72-hour brainstorming sessions that generated 46,000 postings. IBM distilled this torrent of ideas into ten major new growth initiatives, and set aside $100 million to pursue them. Dell* has done something similar with Ideastorm, a website, where customers post suggestions for new features, products and services. The battle for renewal is, at least in part, a battle to capture more than your fair share of the world’s great ideas.

C. Minimize the cost of experimentation. A company can’t explore a lot of new options if it costs millions of dollars (or even thousands) to test each one. Problem is, big companies aren’t very good at quick-and-dirty. Yet to outpace change, every organization is going to have to master the art of rapid prototyping. Here the goal is to maximize the ratio of learning over investment–to find the sweet spot of demand for a new product, or perfect a nascent business more rapidly and inexpensively than your competitors. Listen to Google’s CEO, Eric Schmidt, on this point: “Our goal is to have more at bats per unit of time and money than anyone else.” Your goal should be the same.

So that’s the first three chapters of my never-to-be book. In my next post, I’ll share the last three.

For now, a question: What’s the one thing your company could do to lessen the gravitational pull of the past?

*Professor Hamel has ongoing business relationships with both McKinsey & Company and Dell.


Cheap Gucci Bags Discount