A formula for innovation
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Rita Gunther McGrath is an expert on strategy in uncertain and volatile environments. Clients who seek her advice include large companies such as Pearson Plc., Coca-Cola Enterprises Inc., General Electric Co. and Walgreens Boots Alliance, as well as Swiss-based think-tank, the World Economic Forum. She was recognized as one of the world’s top 10 management thinkers by global management award Thinkers50 in 2013. McGrath has also been recognized as one of the top 10 business school professors followed on Twitter by a business magazine. Co-author of three books on strategy management, McGrath plans to launch her strategy management consulting business in India soon. Edited excerpts from an interview:
Why is India an attractive destination for you to set up your firm?
India has got a huge potential for growth and change. And part of what we are trying to accomplish with the company we are setting up is to enhance the level of management prowess among Indian companies and see if we can professionalize some of the skill sets that go into the management tool kit today, like decision-making, incorporating diverse views, getting sophisticated with innovation and planning for the future and developing talent. There is a huge potential to have a big impact in this area.
On your current visit, you have been speaking with several company chief executives in India. What was the central discussion point?
The big theme has been around innovation. Companies feel they need to have and develop a better and more consistent innovation capability. One of the firms we were talking to has recruited a director of innovation and that person did an audit of innovation capability in the company and benchmarked it to global standards and found that they were lagging behind. So there is a big push towards home-grown innovations rather than importing it from other countries.
Innovation is a much abused word nowadays. Though we hear it so often, have companies been able to crack it?
Very few. Few companies have a robust innovation process and what is sad about that is we know what it takes to have real innovation proficiency. It starts with having good ideas. Companies think this is where the problem lies, but it’s not. Most companies have very creative, intelligent people and ideas are pouring in all the time from customers, vendors, etc. The next step is incubating the ones that are promising and taking it to a scalable business. That is where most companies get stuck. Also, they find it hard to fit innovation roles into existing career structures. Historically, innovation jobs were great jobs but terrible careers because you get pulled out of your day job and there is a high failure rate and it is unpredictable. So a lot of very talented people would not voluntarily put themselves in an innovation role.
Also, there is hostility from existing business, as innovation consumes a disproportionate amount of resources as compared with what other businesses get. So there tends to be tension between the existing business and the new ones.
Is there a formula for innovation?
To an extent. You need to have governance and a funding system—some way of making sure the funds are resourced appropriately. You need to have decision-making gates and right planning through a system we call ‘discovery driven planning’. If you look at some of the big corporate disasters, and you look at how they were planned, it was as though people setting up these ventures had facts, but what they actually had were assumptions. And when you put huge amounts of money into these ventures, assuming you knew what was going to happen, the ventures would fail. So what we concluded was that the fault was not with planning per se, but because of the wrong kind of planning. So plan meticulously, then see whether the outcome you are creating through this plan is actually what you want to see happen. If it is not, build in a mechanism to help correct it. This reduces risk and costs.
What is the latest in innovation?
We are hoping to take this to the Indian government for designing policy outcomes and to talk about how to create a truly learning organization in a government context.
Government policy has not caught up with the transient advantage economy where advantages keep getting shorter. They also presume a level of stability that no longer exists in the economy. So a lot of policies in place have unintended consequences.
It’s often said that start-ups are more innovative than large corporations and that as companies grow bigger in size, it becomes more difficult for them to remain innovative. How can large organizations sustain a culture of innovation and can they compete against start-ups in terms of innovation?
I think it’s doable. The good news is that we have learned a lot about how to do that. The bad news is that it can be a big challenge to existing forms. Most of our institutions and indeed most of our metrics and measurements are designed to exploit an existing established business. If you look at quarter-by-quarter reporting, management by objective, management by exception, they are all designed around the assumption of a stable ongoing business. Whereas what you have really got in the real world is a much more dynamic environment. Organizations have to learn to continually reconfigure so that they don’t get stuck, learn how to get out of fading businesses, learn how to move resources around the organization so that you don’t have a few dominant people hanging on to the vital resources.
In start-ups, we speak of a high risk and a high rewards situation—is it possible to reduce/mitigate the high risk and still have a high rewards scenario?
Yes and no. What I often hear people talking about is the rate of failure. The argument is that if you can keep your failures inexpensive then the rate of failure doesn’t matter. Where I have a huge concern is that you have got these huge populations of start-ups in the Silicon Valley and at other places that are valued at more than a billion dollars and their burn rates are stunning. They are not being run like cost conscious start-ups; they are being run as if they are already Google. And that is because the venture capitalists don’t have anywhere else to invest their money, and so there is this kind of bubble that is emerging. And people have left behind the basic principles of good entrepreneurship, which is basically that you keep your costs down until you have validated your proposition. The Silicon Valley start-ups are not like that. They say that to get good engineers I need to have free food in the cafeteria, an on-site gym and all the other perks. My concern is that all of this really flies in the face of building a really sustainable business. So when you come back to risk, I think that at the moment we have lost sight of good principles of managing the cost of failing.
There are plenty of good start-ups that don’t need billion dollar valuations to be successful. What I do think is more of concern today, than in the past, is the effect of network principles on businesses, because many businesses today have the quality that each additional user they get makes their network more valuable. In the US there is a company called House, which is a very simple website about renovating a house, where people can post pictures of things you like and where you can buy them. This website is now worth more than a billion dollars. One of the things that is making it so powerful is that each additional user that contributes content to the website is increasing the value of the website for all the other users.
Most start-ups today have that quality. But, here’s the trouble. Once you have got one network to do something, say a Facebook or Twitter, it’s very hard to start another network, because the first network is already ahead in the race to build more users and more value.
Does it make sense to pursue a model that has already been established in the market?
It makes sense if you have got a unique selling proposition. There is a network that is trying to undo LinkedIn—which is, even if you have connected to someone on the LinkedIn network it is very difficult to get their contact details. Secondly, they do not allow you to send emails from LinkedIn to any other network—they try to keep everything buried within and they don’t let you communicate with anyone who is not a connection. For a certain population of LinkedIn, these features are very irritating. This new network allows you to communicate with anyone else on the platform. You can connect with people directly even if you don’t know them. This has the potential to be extremely valuable. So there are some of these start-ups which are carving out this dissatisfied niche in an existing market.
In your book, ‘The End of Competitive Advantage’, you speak about short-term advantages that companies have to leverage. Does that render sustainable advantages irrelevant?
I think it’s still very relevant but it’s different than the traditional models. In traditional strategy, barriers to entry were things like big, expensive assets, huge plant and equipment or really deep expertise. Today, what we are seeing is that sustainable advantages tend to be more embedded in your people and talent or the network effects that I was referring to, or things like these that make it hard for others to make critical mass. So there are still sustainable advantages, it’s just that they look different.
With short-term opportunities, you might not have the foresight of what opportunity you might seize. How do you plan for the future then?
I think it’s a question of taking your options. Take the example of payments: if I am a bank, what I would be wanting is some options in my portfolio, which are small investments I make today that buy me the right, but not the commitment, to execute against those. So I will probably want some equity investment in a venture that is investing in mobile payments, I will probably want a partnership agreement with Vodafone, I will want a few college professors that are working on exciting technologies that I can get a licensing right to. The thing to notice is that these are small; they are not intended to be businesses, but they keep my window open on that space, so that when something interesting happens, I can be early in.
It is difficult to plan for the future because we don’t know what’s going to happen, we can only make educated guesses. So the next best thing to do is to position yourself to learn faster than anybody else.