The Drucker Forum 2017 in Vienna last month gave considerable attention to the role of a corporate strategy in a rapidly changing world. In particular, Steve Blank explained how CEOs have to grapple with five new forces, that led, among other things, to Jeff Immelt losing his job as CEO of General Electric (GE), despite a massive multi-year effort at innovation through the Lean Startup approach.
Systematic Innovation Through The Lean Startup Approach
In the 20th Century, Blank said, the assumption was that startups were simply small instances of large corporations and that they should therefore do all the things that large corporations do, only smaller. We now realize that large companies in the 20th Century were very different from startups. They were mainly executing known business models, while startups were searching for them. In the 20th Century, we didn’t have any tools or formalized methodology for searching for new business models.
The Lean Startup approach, which Blank helped inspire, was an effort to provide such a methodology, initially for startups. It has achieved wide acceptance in Silicon Valley: every startup now says that it does Lean Startup. The US Government has adopted the Lean Startup approach as the standard in the Innovation Corps (I-Corps)) for all science investment in the United States. The Harvard Business Review article, “Why The Lean Start-Up Changes Everything” in 2013, suggested that the approach could be adopted to innovation in any corporation. In effect, the article nudged big corporations to think about adopting and adapting the Lean Startup approach to deal with the continuous disruption that every large corporation is now facing.
Blank noted that two of the largest companies that enthusiastically embraced Lean Startup approach were General Electric (GE) and Procter and Gamble (P&G). Yet after some years of training all their managers and energetically implementing the Lean Startup approach, both firms have run into difficulties. A hedge fund, Trian Fund Management, now has a seat of the board of directors of both firms. Already, the CEO and leaders of innovation at GE have been fired and the new CEO is talking about major cost cutting and discarding less profitable activities so as to boost immediate financial returns. One doesn’t have to see too far into the future, says Blank, to realize the possibility of similar developments at P&G.
Five Forces Impacting CEOs
Blank pointed to five forces that help explain what has happened at GE and P&G and why. These forces are impacting corporate executives, particularly the C-suite. Two existed before in a lesser form and three are ones that they never had to deal with in the 20th Century.
- Board expectations: What are the corporate board’s expectations, not just for profit and revenue, but also for innovation? Do you target growth, or profits, or net assets? In the 20th Century, it was pretty clear what corporate boards were looking for and smart CEOs were always in contact with their boards to make sure that their respective expectations were aligned. Now board priorities are often less clear or predictable.
- Competitors: What about competition? In the 20th Century, CEOs obviously had their antennae out for the competition. Who were your peer competitors? What were they offering? Were your customers complaining or saying that the competitor was cheaper or better? Or more advanced in their manufacturing? Those were the 20th Century benchmarks. And you still worry about them in the 21stBut now competition goes way beyond peers.
Thus there are several new factors, some of which tripped up GE and P&G.
- Activist investors: The rules concerning activist investors have changed completely. “Activist investor,” says Blank, is the 21stCentury name for corporate raiders. In the U.S., it used to be that a corporate raider had to own a substantial portion of the stock to take control of a corporation. Now the corporate raider that has taken a board position at GE and P&G owns less than 2% of the stock. So how does it engineer a change in the entire strategic direction of a corporation that employ hundreds of thousands of people with such a tiny shareholding? In the U.S., it turns out that institutional investors, such as mutual funds, pension funds, and university endowments, now own a majority of the stock of large US corporations. They used to be long-term holders of stock. Now, they are more interested in immediate gratification. And activist investors have played to that interest in obtaining immediate gratification. They argue that if a firm takes on a ton of debt and buys back stock and dumps all the parts of the business that are poorly performing, they can pump up the stock price and all the institutional shareholders will be happy. That may be great for the shareholders in the short term, but it kills innovation and reduces the long-term value of the firm.
- Disruption: Another thing, which Blank says has snuck up on us, is the nature and scale of disruption.
- First, disrupters are much larger. Startups in the 20th Century were what Blank used to “ankle-biters.” They could only get up to the ankles of a big corporation. They were certainly annoying, but they were never real competitors. That’s because they never had the cash to be competitors. Today, startups can now raise hundreds of millions of dollars, even billions. They often have more capital than the incumbents. That’s a huge change in the level of threat that these startups represent.
- Second, disrupters deliberately break the law: Some startups are now focused on breaking the law in order to disrupt the industry, for example, Uber and AirBNB. They are intentionally set up with the thought that if they can get away with breaking the law, they can reshape the entire industry. Big corporations never even considered that as a strategy in the 20th They still can’t do it today, given regulatory oversight.
- Disintermediation: Finally, the Internet has allowed consumers to bypass existing distribution channels, upending business models in almost every industry (newspapers, media, retail and so on) while allowing the aggregation of information from billions of people (social media) and devices (the Internet of things),
These are the forces, Blank says, that are impacting big corporations. Blank gives due credit to Jeff Immelt at GE, and the CTO and CIO of P&G, for having their focus on long-term innovation strategies for their companies. But they were tripped up by these short-term pressures on innovation that are both unpredictable and stifling to innovation.
The Need For An Innovation Pipeline
At the same time, says Blank, not all the blame rests with hedge funds and institutional investors. In his recent HBR article, Blank also faults GE for failing to develop an innovation pipeline
- “Companies and government organizations are discovering that innovation activities without a defined innovation pipeline result in innovation theater. And an innovation pipeline needs to be driven with speed and urgency and results measured by the impact on the top and bottom lines.”
- “In hindsight, GE Fastworks wasn’t the problem at GE, and while Predix Cloud has had a painful birth, GE’s investment in the industrial internet of things and lean methods will pay off in the future. But the impact of future innovations couldn’t compensate for poor execution in its traditional businesses. GE’s board was not happy with the company’s margins and stock price, or how Wall Street viewed its future. The immediate threat of a proxy fight with an activist investor forced a decision on the future direction of the company.”
- “When organizations lack a formal innovation pipeline process, project approvals tend to be based on who has the best demo or slides, or who lobbies the hardest. There is no burden on those who proposed a new idea or technology to talk to customers, build minimal viable products, test hypotheses or understand the barriers to deployment.”
The Innovation Challenge Is Even Greater In The Public Sector
Today, as Blank spends time with government agencies, he’s observed that, like companies, they are also facing continuous disruption. But the consequences are greater, as a failure of a government agency can potentially impact the safety and security of the country. The USA can afford to have Macy’s go out of business Blank says, but it can’t afford to have agencies of its government go out of business or its citizens could die.
In one sense, says Blank, the leadership challenge in government is much like the challenge for companies – managers end up as leaders because they are good at managing people and processes to execute the current business model. But in government agencies, it’s worse, because the top level comprises political appointees; and they get guidance not from Wall Street but from congress, laws, cabinet secretaries or national intelligence directives and their staffs build organizations to execute that guidance.
For example, if you are an intelligence agency, every year, you are tasked with a set of activities and you try to implement those activities. What leaders don’t always understand is that every year their capabilities degrade (as new, unplanned threats emerge, tradecraft and tools become obsolete, and security breaches occur) even if they brilliantly execute their current mission. Moreover, they don’t always realize that they not only have to execute their current mission: they also have to create new capabilities for security threats over the horizon.
So in the world of continuous disruption, leadership in an intelligence agency should define the term, “innovation” to mean: 1) can we create new capabilities to replace the ones that are constantly degrading? and 2) can we create new capabilities to leapfrog our adversaries?
The solution to dealing with 21 century disruption for both government and companies is the same – a rapid innovation pipeline that’s disciplined, evidence-based and data-driven, that delivers solutions with speed and urgency.