Summary
Notes
Transcript
But leverage assets. That didn't happen. And so that led Mike and I to write this book called Winning Through Innovation, which was our attempt to understand why sometimes Successful firms become inertial. They become resistant to change. In doing that research, it became clear to us that there are companies that in the face of change are able to do play the two games, to leverage their assets into new businesses.
They were entrepreneurs within their organizations. And that led to this third book called Corporate Explorer, which is really a bottoms up story. Leading Disruptors is a top down story. Corporate Explorers is a bottom up story. So that's what has kind of obsessed me for these many years, trying to understand What is it about What is it that leaders can do in the face of disruptive change, which obviously you have spent a week talking about? Now, We have a colleague.
Bill Barnett. And Bill studies entrepreneurs and organizations and strategy. And I was listening to Bill talk a couple years ago. And he said something which stayed with me. What he said was, your job as a leader is not to predict the future. It is to design organizations that can discover the future. That's what I want to engage in conversation with you about. How do you do that? How do you design an organization?
that in the face of change can do the experiments necessary to discover the key. That's where we're going to go, okay? So let's go back 20 years. This slide is basically 20 years old. Thank you. It's a list of industries, product, service, model. And if I were to ask you, what is true of every one of these industries? It's as true of hospitality as it is semiconductors. It's as true of the automobile industry as it is healthcare.
Clearly technology, I mean you're weak, basically, about that. Clearly technology. That's not the only thing that's disruptive. What else is constructive? The business model. Clearly different business models. Any other sources of disruption? The rail working? The processes and the procedures, the way we actually work, anything else? The way we consume this. Different shifts in consumer preferences, changes in government regulation.
Mid-1960s, Omega, great Swiss watch company,This supports our research plan Two engineering faculty at the University of Neuchatel These two faculty members came up with some of the primary appendix on digital timekeeping. Because they were supported by Omega, they grow from Neuchatel to the old where Omega is based. They made a presentation on senior managers of Omega about this revolutionary new technology, electronic watches, where for a fraction of the cost, You can make a watch that was more accurate than you can make a watch. Because Omega had right of first refusal of this technology.
So from 1860 to 1960s, the Swiss nominate the clock and watch industry. And we know what our customers want. Omega is making a lot of money, the customers are happy, and indeed, if we as Omega were to go to one of our Omega customers and say, "Leandro, you have this great Omega watch, we can give you a $15 electronic watch that is more accurate." What does your customer say? No thanks. No thanks. I love my watch.
This is the key part. This is the part. This is a cheap watch. And by the way, the marketing people look at that and they say, you know, if we start selling a cheap watch, what does that do to our brain? Cannibalize.
Look, if you're a finance person, Yeah, look, if you're a finance person, look at the margins on this. I mean, yeah, we're going to sell more watches, but we're never going to make any money on this. And the engineers looked at me and they said, look, we're mechanical engineers. We've got all this investment in human capital and precision mechanical engineering. This is electronics. We don't know anything about that.
By the way, this is not who we are. We are art and science. We are not electronics. They pass on the technology. Six months later, these two faculty members go to a trade show in Paris. This is a little company called Vittoria Seco. They take one look at this technology and they say, you need to tell us that we can make these cheap and accurate watches. What you see between 1970 and 1985 is the destruction of the Swiss watch industry.
Basically, you know, 600 small companies go out of business, 60,000 people in the euro lose their jobs. It's only in the mid-1980s that Nicholas Hayek comes in for what he's been called SMH. And he saves the Swiss watches. And they begin to compete at the low end with Swatch and Flick Flack. They figure out how to sell a low end watch that doesn't compete directly with their high end brand and sell it as a fashion watch.
And in the face of that, here's what we're seeing. These are big American companies. What we're seeing is the average life expectancy of a company in the standard course 500 today is about 13 years. Something about what that means. What we're seeing at least in the US. We're seeing great companies become less and less relevant, replaced by new companies. Or as I said, sort of being in corner versus going bankrupt.
Now, there are two things about this list that are relevant for us today. The first is, this is not just an American thing. This is Kodak in the U.S., this is Karchatat in Germany, this is Kermit on the Canada. This is happening around the world. It's happening faster in the US because of our capital markets. This is happening around the world. The second thing which is more relevant is if you do the deep dive What you see is the reason most companies go bankrupt This is not technology.
Companies like Nortel, Nokia, they have the technology. They go bankrupt because they have leaders who can't play two games at the same time. That's the best of sports. It's not a technology, sir.
What struck me was 40% of the population of their CEOs that they survey in confidence. said that they didn't think that their companies would be economically viable in the next decade. That's so good. The President: Companies are saying, hey, I'm not-I'm not sure if we can continue on this trajectory. We're going to survive. So that's the problem. What did you tell me? We study this, but you actually live it. Why is it so hard to change your successful company?
You've got no sources. First, do you need something that made you successful? Do you need to again make more successful? Why would I change?
Especially when the change occurs when we're making money. So, I mean, you know, mid-1960s, the price should go up in a good chance. It might come along in a month.
The investment required to innovate And it requires, potentially, that we pull resources away from our profitable business.
Cousin house. People don't like it. My wife says the people who are most resistant to change are people who write about it. She looked at me. Good. So why does senior leadership They're very comfortable in their positions.
And... We're rewarded for it, right? Great. I always think back, and you probably know more about it than I do, but the story of Kodak and. You're talking about? Where Kodak, the leader from, he knew what changes to make, but the company sat there and gave lip service. And they just didn't follow through with it because the culture was so attached to the name of culture. The photography and the other thing that came with it, the pride they had with Fujifilm at the same time, in the same circumstance, almost the culture of Fujifilm, the Japanese culture, said, hey, we don't have to attach ourselves so much to this identity.
Well, I always look at why do these foundries or innovation labs always fail? Because every one of these big companies have them. And every single cycle when there's a recession or anything that doesn't look like it's going right, it's a nice to have checkbox that they never end up taking seriously. And the moment that it's in the way, they just shut them down constantly.
And if I had been in the meeting, I wouldn't have believed it. What the CEO said, and this is close to a quote, he said, Mark, He said, I got two years left in the job. My compensation depends on the stock price. If we begin to pull resources away from our existing business, that's going to affect the stock price. You said I'm not going to do that. Need it? They're on my list. So there's this notion of short-term incentives that drop off. You understand.
This is easy for outsiders like myself to say, well, you ought to change. It is hard to make these changes. So here are the four big things that I want us to start with. The first is the notion of strategy and execution. Strategies of the Board. CEO of the Japanese company that's undergone an amazing transformation, and we just finished a case on it. Said something interesting. He said strategy is a commodity.
What he meant by that was, you can buy strategy. You can go to McKinsey or DCG. You can put a bunch of smart people on strategy. You can do the analysis. Strategy is important. But execution is where you make money. So I want to give you a way. We can spread this. I'll show you what it's like. Then I want us to spend time together.
And Microsoft, I'm gonna show you how Mandela changed the culture, successfully changed the culture in Microsoft. 140,000 people changed the culture. We don't have a human culture, so we're going to talk about culture as a way of executing strategy. And then at the end, I want to sort of talk a little bit about, okay, I'm going to go back to where we were talking about why it's so hard to do this. And there are companies that are successful at playing two hands at the same time.
So here's my agenda. First session, I want to set up this notion of strategy and execution and define culture in a way you can align it with strategy. But to do that, I have to teach two MBA courses in 10 minutes. Nice to meet you. How many of you have, I know a bunch of you have MDAs. Who has MDAs? Okay, all right. Jihan? John? Jump. Jump, okay. I'm going to teach the strategy course in two slides. And I want you to tell people if I've left out anything from your MBA study. I'm going to teach the whole management course in a single slide.
And once you tell people what I've got to have, it's important. So that's our first session. In the second session, I want to then talk about this notion of culture, culture change, of ambidexterity. How do you actually implement this and align culture and strategy? And the DeVita case, I need you to be honest, You can do it either way. How many of you-I know it's your last day. How many of you actually read the Davidic tapes?
Thank you. For those of you who didn't, not a problem. We're going to talk. The reason we're going to talk about DaVita is not because we care about DaVita. It's because their CEO is the most intentional CEO I know of when it comes to management. I've got some remarkable video of it, and you're going to see exactly how. This is a very strong cultural organization. We're going to see exactly how he manages culture.
ETFs create a major issue because the large get larger and the small get smaller. So unless you're able to do one set and replace them off with a controlling shareholder or a stable base, it's tough to navigate. But even if you do that, that then knocks you out of capital markets access.
And Sears had been America's biggest retailer for 50 years. They dominated. The retail landscape in the United States So There have been three books written on the seniors, so we actually have some insight into what was going on with the senior executives during this period. In 1973, they build the world's tallest building, the 110 story Sears Tower in Chicago. Imagine in 1981, We are interviewing a senior Sears executive in the Sears family.
And we asked that executive, You know, what do you think of this company called Walmart? What do you think they would say? And be clear, 1981 is seriously making a lot of money. What is the executive order? Because. A lot of real friends. Exactly. Why are they not afraid? They're small, they're regional, they're in the south. They're a low margin business. And actually what one senior executive says, and this is a quote, he said, "They are not our competitor." Thank you.
You get to choose. Meanwhile, what is Walmart doing? They're getting bigger and bigger and bigger. 2004, Fierce is flirting with bankruptcy. They're bought by Eddie Lampert, hedge fund manager who'd already bought another low-end retailer called Kmart. Start of 2018, they go bankrupt, unchecked last month, there are five Sears stores left open, and you've got to ask yourself how many. What were their senior leaders doing?
Could they have been best by your Home Depot? Of course. You got trapped. For all the reasons that you were Just like the Swiss. Now here's Walmart, Walmart's different. Walmart sells under 71 different brand names, what they call banners. What Walmart is doing is they're leveraging their assets and capabilities, which is the purchasing power, they're leveraging it into adjacent businesses. So they get into the grocery store business. They put a bunch of grocery store cheats out of business. They've experimented with the smaller fish.
Three years ago, 90% of the US population lives within 10 miles of a Walmart. That's their degree of penetration. The average income of a Walmart customer three years ago was $70,000 a year. One of the big concerns of their customers is affordable quality healthcare. As they get bigger, they are experimenting with healthcare. They're going right after gas stations in New Zealand. They bought jet.com and are competing directly now with Amazon. Last year, 15% of Walmart's revenue came out of online sales.
George Fisher, then CEO of Motorola, PhD engineer, smart guy. A brain failure man. To remove codec into the new tissue. 2000 is fired. And of course, 2018. We've got a board that said we've got to do this. You can go and do it, we've got the resources to do it. I want you to listen to this. A colleague of mine four years ago interviewed Fisher. He asked a psychological question. He said, you know, as you look back, Why were you unable to change codec?
I would have spent a lot more time up front, especially on the cognitive inertia side. Okay. I think that I didn't realize how much my own mindset had been shaped by 18 years at Motorola. and how much of that I was transferring into a totally different culture, a good culture but a different culture. And as a result, how my expectations in some respects were shaped by that frame in of the motorway.
I think I would have spent, if I were to do it over again, a lot more time thinking upfront, and I would suggest that anybody coming from the outside to be a CEO of a company whose culture they don't fully understand I would suggest they spend a lot more time up front trying to understand those differences. Why didn't you get to culture? He looks back and he says it's the culture. Why didn't you get it?
When he was at Motorola, they were successful. So we'll pay you deadline. All right. Bring your name to exactly the right point. Here's the head to head comparison. 2000. 2000 is the high water mark for the world's Year 2000. Kodak had 38% global market share in film. Fujifilm has 37%. Today, Gucci film is 20 times the size of Kodak. Same market, same technology. Why? Why is Fujifilm successful and Kodak not successful?
And here's why. So what is your issue? In 2000, the Pucci film is headed by Komori-san. Kumori-san looks into the future and says it's clear film sales are gonna go down. And he said, we have to figure out what, when you do film, film has 23 layers. You're good at surface chemistry, you're good at ecology, you're good at nanoparticles, you're good at that type of chemistry. And what, what, uh, uh, what Marizan does is he sends a, he asks his top 1,000 leaders in the company to write him a memo. and answer three questions.
Given our skills in surface chemistry, Could we leverage those into new businesses? If we got new capabilities, electronics mostly, Could we marry those with our skills in chemistry and revitalize our existing market or move into different markets? And that's exactly what they've done. They've leveraged their skills in surface chemistry into polaroid, back film, and semiconductor materials. They've gotten new electronics.
and sort of gotten into medical insurance. They've taken their the combination of the skills and they've gotten into a Cosmetics. You're a big cosmetics player at Circus. They're into regenerative medicine. That's college. So why are they successful? By the way, the Japanese don't want that.
They're in old, how do they do that? How do you end up in all these prisons? Well, here's how they do it. They start out in 1994 and Bezos sells the investor community on a long-term view. They take all free cash flow and they invest in fulfillment, warehouses, their platform. By 1997, they're selling stuff other than that. In 1998, they said, well, we could sell other people's stuff on our website. platform.
And so they've become the e-commerce platform for companies that like eat toys and they like 2001 they faced a critical strategic decision. Is fulfillment key to our future or not? It's not renowned. 2001 they decided this is the time. They rewrite all their software. In order to make it easier for other people to sell on their site. And they realize they have access to acid. That is the origin of AWU-Must. They discovered me. In 2003,Three. Steve Jobs invites Dave Sells down to prove that he knows how to do it. John describes the Bezos and Co.
as managers. He describes how iTunes is about to completely disrupt the music industry. Bezos goes back to Seattle and says, you gotta be in the hardware business. Because if you look in the future, it's clear people are going to want to read books on the water. And so they set up A9 right off campus here, Lab 126 down at Sunnyvale that does the hardware and artificial intelligence. If you look at Amazon, It's a company that is constantly exploring and exploiting.
If you go into an Amazon warehouse, it is not a nice place. It is all about incremental improvement, driving costs down, efficiency. If you go into lab 126, it's all about sort of artificial intelligence and Alexa. What Bezos says, which I think is true,She said, first of all, how many of you use Amazon to buy things? What he says was, what Bezos says is, customer... He said, I know three things about them.
Black ones. Devices. That increases traffic on this side. If we increase traffic on the side, that will induce other people to sell. Other people. That increases the. They have process. And many years I was on peopleSo they have a process that routinely generates new ideas. If we have time at the end, just call the PR to thank you. Anybody, 1.6 million employees, anybody can submit an idea. Watch. It is a very disciplined process.
You have to complete what's called the press release, where you're going to ask questions. Sixth page. Sorry. If you submit that, And people say, yeah, this is a good idea. You were immediately given some release time. some engineering support, what you're going to do is you're going to get a minimal viable product in front of the customer. You're not worried about competition. You're not worried about cost.
We've read the cases onJapanese companies. I think we understand kind of why it's coming to sale. Let me be a little clearer, and then we'll pick this up at the very end. So if you think about what it takes to be innovative in your organization, there are three separate disciplines. You have to be able to ideation. You have to be able to come up with ideas. But by the way, you know how to do that. You know how to do that. We've got design thinking.
We've got corporate venture capital. We've got open source innovation. We've got lots of ways of generating more of this. That's not enough. Then you have to have incubation. You have to have a disciplined process to decide whether the customer would really like the product. By the way, we know how to do that. We've got lean startup, business model campus. The third discipline is scale. That is when you begin to scale a product.
You have a disciplined process to make sure it gets the resources it needs. In our experience, that's where most companies fail. I don't know. And it's what you were saying earlier about we set up these separate little units. Intel did that. Holy Spirit. They were great at ideation and information. But when the time comes to begin to scale, Then we sawYou look kind of. Great new idea. They did ideation, innovation. They moved it into a line of business. And the line of business looked at it and said, you know, this is a smaller revenue stream. The margins aren't great.
Exhort the mothers. Cool. The intention is that they are willing to resolve the process to get distracted. Can this be outsourced internally to-It has to be the CEO, right? It has to be the top that is driving this. So we worked with IBM between 2000 and 2007. We worked with IBM on their transformation. They had a great internal process. I'll call the entrepreneurial business on these EEOs. They have a They didn't have Gershman.
They had a senior vice president who was in charge of that. So, and the senior vice president was on the deal with the executive leadership team. So it doesn't have to be the CEO, but there has to be a disciplined process so that when these businesses run into trouble, they can go to the CEO. Let me give you an example from IBM. IBM They believe they could leverage hardware, software, and consulting into a healthcare business.
Thank you. started to scale that business. Carol Kovac who is running the business. They began to scale and they needed more resources out of the consulting business. And the junior was running the consulting business. And she said, I can't give it to you. If I give you more of my consultants, it's going to affect my bonus. I'm not going to do it. Carol went to Bruce Harrell. And Bruce Harrell said to Carol, you got to do it.
He's angry because they were under margin pressure and all the businesses were putting So, Berkshire returns to Harold and he said, "You know, I am tired of us losing markets. He said, I want you to do a study. I want you to identify all the technologies that we, the IBM company, developed that we didn't make any money on. And Bruce's organization did that. And they identified 29 separate technologies, including routers, by the way.
The first commercial router was an IBM product. If IBM had succeeded with that, Cisco would be around. They did an analysis about why they failed. They identified two big reasons. First reason was We have no systematic way of looking on the future. We are so obsessed with our existing customer set.
But R&D produces Technologies and products, it does not produce new business.
It was even worse than that because even when they got into these businesses, sometimes fail because they had leaders who were great leaders at running big, mature businesses. They didn't know how to run these entrepreneurial businesses.
What's different and important is you also have to be explicit about how you're going to align the organization Execute the strategy. What are your incentives? What is the structure? What is the taking over? By the way, what is the culture?
So here are the five questions. First of all, who are my customers? Who am I going to serve? Once I've answered that, I can now talk about a value process. I can't talk about value. The Press: The value proposition is why should they choose me? This is your differentiation. It could be cost quality. Then I have to do my economic analysis. Where in the value chain do you make money? What are my economic supply?
What are my competitive economic supply? Then I can answer, make an informed choice about how much I need to do internally, how much I can do externally. outsourced. And the last question is-If we implement this, we know the competition is going to be So what can we do right at the beginning of the cycle? OK, that 10 weeks, that's our course, Gia. Anything you should add to that?
If I say my strategy is to be low cost or customer centric or innovative or whatever, One of the four or five things that I have to do. These are my eSuccessFactors OKR business driver, or whatever you call it. All the management course We spent four weeks talking about theories of motivation. Do we have the right people? Are they motivated to get this done? We then spent four weeks talking about, are you organized the right way?
Are you measuring and reporting the right thing? We talk about principle, agent theory, and a bunch of theories, but speaking is basically straightforward. And then we spent two weeks talking about what people share a set of expectations about how they need to behave in order to execute this. It's been 40 years since we've carried out research on this. Fit me to performance. You know, there are a bunch of these models out there.
And in 2006, their co-CEO, Henry Conrad,I had a strategic review, and what that review showed was that the Global market for their new $20, $30 million ERP systems. Global market in 2006 was flat. It was going to decline gradually over the next decade. I hope you don't see that mark. And so in 2006, Cochran said, you gotta get people with markets. We've got to leverage our assets and capabilities to improve our markets.
Sales. They're not going to get a cut.
I mean, think about selling these BBR pieces. It's a very high level sales. Very long CF cycle. Big dollars. The salespeople look at this, they hate it. Who else is going to be obsessed? The tech people hate it because they came to work and love designing these complicated systems. And now you're selling what they refer to in German as toasters. What? The finance company. The revenue revenue The valuation retailers because they don't have any business.
If you think about the alignment that it takes to compete in these different businesses, the alignments are completely different. Hey, I think you're trying to screw it up. They tried to do this with a cross-function team deep in the organization. Because nobody wanted this. So this is the The slide I took from the team that made their final presentation, they got killed. And platinum fired Apple Decker because of this.
And then because it's the right strategy, they went out and spent 3 billion bucks to buy success factors and then another 8 billion bucks to buy concurred technology. Today they're doing fine in this business. Cost of $11 billion in acquisitions. They lost $1 billion in three years. Any questions? Culture. Critical part of. This issue of culture, People are finding things. Especially in the case of. People become much more aware that culture can be competitive with damage.
The thing that I have learned at IBM is that culture is everything. If you're going to have a high performance enterprise, An institution that wins, that continually wins in the marketplace, You've got to have an environment that's supportive of the execution that you need to carry out the strategy that you defined. And so in this case that you've all read, The reason, the main reason That the prior management couldn't move IBM. Was that... The institution Couldn't move. It wasn't a case of not having a strategy.
It wasn't a case of being told to execute. It was a case That the behavior and the systems and the values in the institution had been created for another age. Another time. Another strategy. And that until we got to The issues of culture And values and behavior, we never, ever would have changed IBM. Okay, that's Lou. What's ironic,Three, at least.
Of course you know if you follow IBM, you know that theyThey've struggled over the last decade. Their currency, Krishna, has come to the exact same conclusion that Gerstner did. The reason that they are struggling is because The culture's not. Ben Horowitz, many of you know Ben as the managing partner of Andreessen Horowitz, Ben's a huge believer in culture. And when he says, I agree, No. There are lots of bankrupt companies that had a great culture.
I'm gonna go to my boss and watch my boss and then I'll talk to my colleagues. And my colleagues say to me, "Look O'Reilly, if you want to succeed, you should do A, B, and C. By the way, you should never do D, E, and F." Do I hear that from a group of people? Is it a new employee? That is their social control system. I have a choice. I either do A, B, and C and fit in, or if I do D, E, and F, I'm going to do it. So think about culture as a social control system.
Then the question becomes, is that social control system lined up with your strategy or not? Think about what that means. The culture of the form Let's get even more. Bueno, bueno. When I talk to senior leaders about culture, The default Response is values. Leaders talk about values. Values are on the air. You can't manage values. You can stipulate what your values are. You cannot manage them. And if I come to work, an organization that says, we value x and y, that's fine. But if I see people who are not engaging with x and y,-As the pattern of behaviorour bosses, our colleagues, and systems.
How we recruit, how we onboard, how we train, how we promote. See, if I'm in an organization where there is great focusOne. The pattern behavior. That is the control system. By the way, you know how to manage. Patterns of Satan. I don't know how to manage values. I know how to manage patterns of behavior. Great.
They'd lose power brakes. They'd lose power steering. More than 100 people were killed. And people in the organization knew about it. Nobody did anything about it. And they did a big external report and it was the culture was identified. So Mary comes in and she'sTo change the culture, she hates the word culture. What she's done is she's identified seven behaviors She's been driving those behaviors into the organization.
Specifically, shaping the culture and changing the culture is what my leadership team and I are focused on at the moment. To understand that, you need to know what our four core values are. They're respect for the individual, Strive for excellence. serving the customer and acting with integrity. And those four core values have been around in Walmart for a long time. They're written down after watching Sam Walton work. When he started the company, he didn't say, these are our four core values and stamp it into stone. He just was an entrepreneur working, and others around him saw those behaviors.
loving appreciative He was all those things, but he also held people accountable to performance. And I have heard firsthand stories of him doing that and know that he did it. So striving for excellence, one of our four core values embedded in that is accountability, personal performance, accountability. We need to, in today's Walmart, drive that up. So we're trying to shape the culture behaviorally as we embrace technology, as we change in a transformational way how Walmart serves customers.