Steve Blank

Innovation theory and innovation in practice are radically different. Here are some simple tools to get your company’s innovation pipeline through the obstacles it will encounter.

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Pete Newell and I’ve been working with Karl, the Chief Innovation Officer of a large diversified multi-billion-dollar company I’ll call Spacely Industries. Over the last 15 months his staff got innovation teams operating with speed and urgency. The innovation pipeline had been rationalized. His groups whole-heartedly adopted and adapted Lean. His innovators and stakeholders curated and prioritized their problems/idea/technology before handing them off.

Karl’s innovation pipeline had hundreds of employees going through weekend hackathons. 14 different innovation teams were going through a 3-month I-Corps/Lean LaunchPad program to validate product/market fit. His organization had a corporate incubator for disruptive (horizon 3) experiments and provided innovation support for his company’s operating divisions for process and business model innovations (Horizon 1 and 2.)  Karl’s innovation process looked like this:

(Read our last post for the details.)

Given all this activity we were surprised that in our last call with Karl he started with “I think they’ve beaten me down.” He listed the internal obstacles his teams continued to face, “We’ve created innovation teams in both the business units and in corporate. Our CEO is behind the program. The division general managers have verbally given us their support. But we’re 15 months into the program and the teams still run into continual roadblocks and immovable obstacles in every part of the company. Finance, HR, Legal, Security, Policy, Branding, you name it, everyone in a division or corporate staff has an excuse for why we can’t do something, and everyone has the power to say no and no urgency to make a change.”

The reality is that Karl’s innovation pipeline looked like this:

And worse, every time Karl negotiated to remove a roadblock for one team, he was back negotiating 6 months later to remove the very same one for a different team.

Karl was frustrated, “How do we get all these organizations to help us move forward with innovation? My CEO has been reading all the Lean Innovation books and wants to fix this and is ready to bring in a big consulting firm to redo all our business processes.”

Uh oh.

Recognizing the Roadblocks
Most of the impediments the innovation teams faced were pretty tactical: for example, an HR policy that said the innovative groups could only recruit employees by seniority. Or a branding group that refused to allow any form of the Spacely name to appear on any minimal viable product or web site. Or legal, who said minimal viable products opened the company to lawsuits. Or sales, who shut out innovation groups from doing customer discovery with any existing, or even potential customer. Or finance, who insisted on measuring the success of new ventures on their first year’s revenue and gross margin. Or purchasing who insisting that the teams use their existing vendors that took weeks to deliver simple purchases that Amazon would deliver overnight.

Listening to this we realized that while the company had playbooks for execution, what was missing were specific processes for innovation. We agreed that the goal was not to change any of the existing execution processes, procedures, incentives, metrics but rather to work with all the organizations to write new ones for innovation projects.

And the specific innovation policies would grow one at a time as needed collaboratively from the bottom of the organization, not top down by some executive mandate or consulting firm.

Read this section again. The creation of the innovation policies incrementally by the innovation groups collaborating with the service organizations is a very big idea.

We pointed out to Karl, that if he was successful, innovation and execution policies, processes, procedures, incentives, metrics would then co-exist side-by-side. In their day-to-day activities, the support organizations would simply ask, “Are we supporting an execution process (hopefully 90% of the time) or are we supporting an innovation process?” and apply the appropriate policy.

We offered that a top-down revamp of every business process should be a last resort. We suggested that Karl consider trying a 6-month experimental “Get to Yes” program. (It was critical that his CEO is a supporter.)

Get to Yes
Step one was that Karl needed a single memo from his CEO to his direct reports. We suggested that Karl ask for something like this:

Step two was that Karl needed a memo that went out to all department heads. The one from Finance looked like this:

The “Get to Yes” Collaboration
Every time an innovation team needed a new policy, procedure, etc. from an existing organization (legal, finance, sales, HR, branding, etc.), they worked with their designated point of contact (Finance, HR, Legal, etc.) Working together the two groups used the single-page standard Spacely “Get to Yes” form. It asked what problem the team was trying to solve that required a policy change, how it wanted the new policy to read, the impact the new policy would have on other policies and organizations, and most importantly the risks to the core existing business.

The “Get to Yes” request form looked like this:

In practice, once the finance, legal, and other organizations had gotten top-down guidance that innovation needed solutions to move forward, in 70% of the instances the approvals could be worked out at the lowest part of both organizations.

For the times that the innovation team and point of contact couldn’t agree, the issue got escalated to the appeals board of the appropriate department (legal, hr, security, finance, etc.) They had one week to ask questions, gather information, meet with the innovation team and evaluate the costs and risks of the proposed process. They could either:

1. approve and adopt
2. suggest modifications that the team agreed with
3. deny the request.

The escalation form looked like this:

Although it was just a one-page form, the entire concept was radical:

• The innovation team would be proposing the new process, procedure, metric, etc. – not waiting for ones to be written.
• There was a hard 1-week deadline for the execution team to respond.
• Yes, was the default answer, a No required detailed explanation.

For the few issues that the innovation program thought needed the executive staff attention, one further appeal was possible to the Chief Innovation Officer.

The big idea is that Spacely was going to create innovation by design, not by exception, and they were going to do it by co-opting the existing execution machinery.

The key to making this work was: 1) a simple top-down request from the CEO to their direct reports and from their direct reports down their organization, 2) a collaborative solution seeking partnership between innovation and execution teams, 3) an appeals and escalation process that would be acted on within the next week. And it’s there that the execution department had to make its case of why this request should not be approved. (If there was still no agreement, it became an issue for the executive staff.)

The time for a process resolution in a billion-dollar corporation – two weeks. At Spacely innovation was starting to move at the speed of a startup.

(BTW, when we showed this process to a government agency their first response was, “Oh that will work in a company, but in a government agency we’re bound by laws and regulations that mandate specifically what we are allowed to do.”  So, we modified the Get to Yes program to ensure that a “No” had to specifically point to the law or regulation, not agency legend, then confirm there was no potential exception to the regulation or law that could be applied.)

Lessons Learned

• Explicit top down support for innovation only takes a single-page memo
  • If you can’t get leadership support, internal innovation won’t happen
• Innovation process and procedures developed by collaboration, not by exception
• Execution organizations now manage both execution and innovation
• Innovation policy, process and procedures get written as needed, one at a time
• Over time a set of innovation processes are created from the bottom up
• Bias for immediate action not perpetual delay

Filed under: Corporate/Gov't Innovation | 11 Comments »

I was in Boston and stopped by the Harvard Business Review for their IdeaCast podcast. I shared my current thinking about innovation in companies and government agencies. The interviewer, Curt Nickisch was great and managed to get me to summarize several years of learning in one podcast.  He even got me to tell my Steve Jobs interview story.

It’s worth a listen.

Listen to the entire interview here:

Or listen to just parts of the interview:
3:29 Entrepreneurs make their own luck
4:35 The difference between an idea and an entrepreneur
5:18 Why entrepreneurship thrived in Silicon Valley
7:10 The pay-it-forward culture
7:53 Failure as part of the process
9:32 When I was more wrong than anyone on earth
11:20 Steve Jobs on Customer Development
12:38 The first time I did customer discovery
14:49 Engineers built products for themselves and the “next bench”
15:27 Why MBA’s avoided Silicon Valley
16:01 20th century investors were not entrepreneurs
16:45 Startups are not smaller versions of large companies
18:18 We needed a management stack for innovation
19:17 HBR and the Lean Startup and corporations
20:09 Why Lean fails in corporations
20:45 Startups can do anything, companies can only do what’s legal
22:0o The team
22:23 Rewards
23:00 What will drive continuous corporate innovation?
24:01 Innovation Theater
24:39 Innovation at speed
25:27 You adapt, or you adopt, or you die

Filed under: Corporate/Gov't Innovation | 6 Comments »

I was at Stanford in the Graduate School of Business and was interviewed by Peter Gardner of StartGrid for his On The Road podcast. I shared my current thinking about innovation in companies and government agencies.

It’s worth a listen.

BTW, it seems every podcast has a trick last question. This one was, “if I was on a road trip what’s the destination and what’s playing on the radio?”

Listen to the entire interview here:

Or just parts of the interview:

01:59     What drew me to entrepreneurship
03:43     What motivates me about innovation today
05:25     Entrepreneurship in the 20th century
06:30     The difference between large companies and startups
07:13     The Lean Startup Lightbulb moment
07:44     An MBA meant Master of Business Administration
08:18     Agile Development and Lean – Eric Ries
09:05     Business Model Canvas – Alexander Osterwalder
12:32     Innovation in Large Companies in the 20^th Century
13:05     Startup Capital at Scale threatens large Companies
13:58     Startups operate with alacrity, agility and at times a death wish
15:06     Companies can only do things that are legal, while startups can do anything
16:00     Corporate defcon level – the wartime footing level
17:41     Innovation Theater
18:23     Did you move the top or bottom line?
19:50     Two types of 21st century corporations
20:55     Hedge funds and dual-class stock
22:28     Innovation pipeline not silos
24:25     Innovation Outposts
26:32     Why Innovators Leave Companies
27:30     We can’t afford to have our government go out of business
28:54    Why I turn on the Beach Boys

Filed under: Corporate/Gov't Innovation | 3 Comments »

If you want to build a ship, don’t drum up the people to gather wood,
divide the work, and give orders.
Instead, teach them to yearn for the vast and endless sea.

Antoine de Saint-Exupéry

I was visiting with an ex-student who’s now the CFO of a large public tech company. The company is still one of the hottest places to work in tech. They make hardware with a large part of their innovation in embedded software and services.

The CFO asked me to stay as one of the engineering directors came in for a meeting.

I wish I hadn’t.

—-

The director was there to protest the forced relocation of his entire 70-person team from Palo Alto to the East Bay. “Today most of my team walks to work or takes the train there. The move will have them commuting for another 45 minutes. We’re going to lose a lot of them.”

The director had complained to his boss, the VP of Engineering, who admitted his hands were tied, as this was a “facilities matter,” and the VP of facilities reported to the CFO. So, this was a meeting of last resort, as the engineering director was making one last appeal to the CFO to keep his team in town.

While a significant part of the headcount of this tech company was in manufacturing, the director’s group was made up of experienced software engineers. Given they could get new jobs by just showing up at the local coffee shop, I was stunned by the CFO’s reply: “Too bad, but we need the space. They’re lucky they work here. If they leave at least they’ll have ‘name of our company’ on their resume.”

WTF? I wasn’t sure who was more shocked, the director or me.

After the director left, I must have looked pretty surprised as the CFO explained, “We have tens of thousands of employees, and at the rate we’re growing it’s almost impossible to keep up with our space needs in the Bay Area. You know for our CEO, ‘love us or leave us’ has been his policy from day one.” (By coincidence, the CEO was an intern at one of my startups more than two decades ago.) I asked, “Now that the company is public and has grown so large, has the policy changed?” The CFO replied, “No, our CEO believes we are on a mission to change the world, and you really have to want to work here or you ought to leave. And because we’re inundated with resumes from people who want to work for us, he sees no reason to change.”

I don’t know what was more sobering, thinking that the policy which might have made sense as a scrappy startup, was now being applied to a company with 10,000+ employees or that the phrase, “…we are on a mission to change the world, and you really have to want to work here or you ought to leave…” was the exact same line I used when the now-CEO was my intern.

Adult Supervision
Before the rapid rise of Unicorns, (startups with a valuation over a billion dollars), when boards were still in control, they “encouraged” the hiring of “adult supervision” of the founders after they found product/market fit. The belief then was that most founders couldn’t acquire the HR, finance, sales, and board governance skills rapidly enough to steer the company to a liquidity event, so they hired professional managers. These new CEOs would also act as a brake to temper the founder’s excesses.

In the last decade, technology investors realized that these professional CEOs were effective at maximizing, but not finding, product cycles. Yet technology cycles have become a treadmill, and to survive startups need to be on a continuous innovation cycle. This requires retaining a startup culture for years – and who is best to do that? The founders. Founders are comfortable in the chaos and disorder. In contrast, professional managers attempt to bring order to chaos and often kill the startup culture in the process. Venture firms realized that teaching a founding CEO how to grow a company is easier than teaching the professional CEO how to find the new innovation for the next product cycle. And they were right.  It was true in the company I was visiting— and in the last five years over 200 other Unicorns have emerged, and most still have their founders at the helm.

And so, this startup found itself with a “founder friendly” board that believed that the company could grow at a greater rate if the founding CEO continued to run the company. This founder’s reality distortion field attracted a large number of employees who shared his vision. It was so compelling, everyone worked extremely long hours, for little pay and some stock. They were lucky, they got the timing right, and after a painful couple of years figured out product/market fit, and went public. And those early employees got rewarded as their stock turned into cash.

The problem was that at some point past employee 1000, the big payoffs ended from pre-public stock and the stock’s subsequent run-up from their IPO. But the CEO never noticed that the payoff had ended for the other 95% of his company. Flying to his remote company locations in his private jet, and surrounded by his early employees who were now worth tens of millions of dollars, the mantra of “you really have to want to work here or you ought to leave” rang hollow for the latest employees.

The company was now attracting interns who did want the name of this hot company on their resume. But since compensation was way below average, they stayed just long enough to pump up their resumes and left for much better paying jobs – often in a startup.

And because fewer senior engineers considered it a great place to work, the company’s initial technology advantage has started to erode.

Wakeup Call
The downside of founders running large companies is that there are no written best practices, no classes, no standard model at all. And given that in the past, founders as a group were rarely in charge as startups became large companies, it’s no surprise. Reprogramming founders who grew their business by being agile, relentless, tenacious, and often aggressive, and irrational and at times, into CEOs that can drive organizational growth, is tough.

This means quickly learning a new set of skills; sublimating large egos, working through direct reports, when their span of control can no longer encompass the entire company; and building repeatable processes that enable scale. At times this comes only after a crisis that provides a wakeup call.

As a startup scales into a company, founders and the board need to realize that the most important transitions are not about systems, buildings or hardware. They’re about the company’s most valuable asset – its employees.

Founders of great companies figure out how the keep their passion but put people before process.

Postscript
I can tell this story now, as the director left the company and founded his own startup in a different market segment. Over the next six months 55 of the 70 employees in his group that were asked to relocate left. 25 of them joined his new startup. And of the other 30 who left?  Six new startups were formed.

Lessons Learned

• Be careful of unintended consequences when you grow
• Recognize the transition boundaries in company size
• Recognize that what drove an Innovation Culture when you were small may no longer apply when you’re large

Filed under: Corporate/Gov't Innovation | 15 Comments »

This article originally appeared in the Harvard Business Review

As more and more companies face disruption from globalization, new technology, and startups that have more capital than the incumbents, the continuing cry from Wall Street investors is, “Why can’t companies be as innovative as startups?”

Here’s one reason why:

Startups can do anything.

Companies can only do what’s legal.

Startups can do anything
One of the unheralded advantages of a startup is what at first glance appears to be its weakness. Initially, a startup has no business model and no market share to defend. Its employees and investors don’t depend on an existing revenue stream. If they select a business model that targets industry incumbents, they don’t have to worry about upsetting existing customers, partners or distribution channels.

Yet those very weaknesses give startups an overwhelming advantage in innovation.  Startups can try any idea and any business model—even those that are on the surface patently illegal.

At times laws and regulations are in place for the health and safety of consumers. But often the legal obstacles confronting startups have been put in place by companies that look to the government and regulators as their first line of defense against new market entrants. (Existing companies also use network effects of monopolies/duopolies, distribution channel kickbacks, etc., to stifle competition.)

In the past, these anti-innovation tools were sufficient to keep new entrants out. But today, investors realize that companies that depend on regulation and artificial market constraints are actually vulnerable. Once presented with an alternative to the status quo, customers who have been locked into rent-seeking companies flock to innovative startups with business models that provide better service, lower prices, etc. Enormous financial returns are available to startups taking on incumbents, regulators and the law. So, startup investors comfortable making a risk capital bet are actively encouraging startups to go after large, static industries that look prime for disruption.

Here are some of the most visible examples.

Uber – current valuation >$70 billion – knew the day they started that their ridesharing service violated the law in most jurisdictions. Carrying passengers for payment, historically considered commercial use, was regulated in most cities.  In addition, some cities put an artificial limit on the number of taxi operators by requiring them to buy medallions and agree to a set of local regulations.  Uber ignored all of these requirements and reinvented local transportation by offering a more convenient service. Today, New York City has 13,587 yellow-taxi medallions and more than 50,000 Uber and Lyft cars.

PayPal – acquired by eBay three years after it was founded for $1.5 billion – started as a money transfer system for buyers and sellers on eBay. Banks protested that PayPal was an unregulated bank; and of course, are regulated by the federal government and states. As PayPal grew, incumbent banks forced it to register in each state. Ironically, once PayPal complied with state regulations by registering as a “money transmitter” on a state-by-state basis, it created a barrier to entry for future new entrants.

Airbnb – current valuation $31 billion – allows people to rent out their homes, rooms or apartments to visitors. Not surprisingly Airbnb violates local housing laws and regulations in many cities.  None of the renters pay hotel or tourist tax.  Every Airbnb rental is a lost night of revenue for hotels that hate it.  The company has more rooms available then any hotel chain.

Tesla – current valuation $50 billion – sells cars directly through its own distribution channel. To protect auto dealerships in the 1920s, direct sales by an automobile manufacturer were made illegal in most states in the U.S.  Because Tesla believed that existing auto dealers would have no incentive to sell electric cars, they created an alternative option for consumers.

Companies can do anything legal
In the 20^th century companies worried about increasing their market share, profit margins, return on investment and return on net assets. They tenaciously protected their existing markets from other existing companies that were using the same business model. They very rarely worried about disruption from new firms as the barriers to entry (financial, legal, regulatory) were so high.

Ironically once companies become locked in their entrenched market positions, it became difficult for them to compete by breaking the same laws or untangling their existing channel relationships. In contrast to startups, companies are constrained by local, state and federal laws and regulations.  The risk of breaking laws can result in large penalties and shareholder lawsuits.  The Justice Department and State Attorneys General find large companies attractive targets.

As a consequence, one of the roles of the legal department in large corporations is to protect the company from straying into any legal or regulatory danger. (For example, when Volkswagen discovered their diesel cars couldn’t pass U.S. pollution standards, it faked the tests by programming cars to pass inspections. However, in normal driving these cars put out over 40 times the allowed nitrous oxide pollutants allowed by law.  After it was discovered, legal penalties cost Volkswagen $18 billion and several indicted executives.)

Yet trying to stay within the legal lines companies paint themselves into a corner by creating their own internal barriers to innovation. Instead of innovating, most industries being disrupted turn to litigation.

To compete with Tesla’s direct sales to consumers, GM, Ford, and the rest of the auto industry either have to shut Tesla out of selling directly to consumers or they have to abandon their own dealer networks and sell directly as well. It’s an untenable and unsustainable position as consumers find car salesmen to be one of the least trusted groups. To defend their dealer network, car makers decided to litigate instead of innovating.

Taxi companies needed to start copying Uber’s business model but instead they turned to lobbyists and legislation to convince cities that deregulated ridesharing was a bad idea.

Hotel chains burdened with even a greater capital investment in their physical buildings are doing the same thing.

Corporations using existing business models have people, processes and revenue goals that can’t be changed overnight. These incumbents tend to have short-term goals and incentives (stock price, quarterly earnings, year-end bonuses) and often fail to recognize that more money can be made on new platforms and new distribution channels. In each case litigation versus innovation is seems obvious choice.

What can a company do?
The introduction of new technology has always been disruptive to existing markets, particularly to those who sell through well-established distribution channels and have extensive capital equipment and fixed investments. But today, as disruption happens faster, and is funded at enterprise scale, companies need to figure how to create a portfolio of innovation. They can do so by first identifying technology trends with innovation outposts located in technology centers; second, by investing in early-stage disruptors; third – buying disruptors and keeping their innovation culture and people; while fourth, creating an innovation culture internally that disrupts their own business model before others do.

Filed under: Corporate/Gov't Innovation | 12 Comments »

What happens to a company when a visionary CEO is gone? Most often innovation dies and the company coasts for years on momentum and its brand. Rarely does it regain its former glory.

Here’s why.

Microsoft entered the 21st century as the dominant software provider for anyone who interacted with a computing device. 16 years later it’s just another software company.

After running Microsoft for 25 years, Bill Gates handed the reins of CEO to Steve Ballmer in January 2000. Ballmer went on to run Microsoft for the next 14 years. If you think the job of a CEO is to increase sales, then Ballmer did a spectacular job. He tripled Microsoft’s sales to $78 billion and profits more than doubled from $9 billion to $22 billion. The launch of the Xbox and Kinect, and the acquisitions of Skype and Yammer happened on his shift. If the Microsoft board was managing for quarter to quarter or even year to year revenue growth, Ballmer was as good as it gets as a CEO. But if the purpose of the company is long-term survival, then one could make a much better argument that he was a failure as a CEO as he optimized short-term gains by squandering long-term opportunities.

How to Miss the Boat – Five Times
Despite Microsoft’s remarkable financial performance, as Microsoft CEO Ballmer failed to understand and execute on the five most important technology trends of the 21^st century: in search – losing to Google; in smartphones – losing to Apple; in mobile operating systems – losing to Google/Apple; in media – losing to Apple/Netflix; and in the cloud – losing to Amazon. Microsoft left the 20^th century owning over 95% of the operating systems that ran on computers (almost all on desktops). Fifteen years and 2 billion smartphones shipped in the 21^st century and Microsoft’s mobile OS share is 1%. These misses weren’t in some tangential markets – missing search, mobile and the cloud were directly where Microsoft users were heading.  Yet a very smart CEO missed all of these.  Why?

Execution and Organization of Core Businesses
It wasn’t that Microsoft didn’t have smart engineers working on search, media, mobile and cloud. They had lots of these projects. The problem was that Ballmer organized the company around execution of its current strengths – Windows and Office businesses. Projects not directly related to those activities never got serious management attention and/or resources.

For Microsoft to have tackled the areas they missed – cloud, music, mobile, apps – would have required an organizational transformation to a services company. Services (Cloud, ads, music) have a very different business model. They are hard to do in a company that excels at products.

Ballmer and Microsoft failed because the CEO was a world-class executor (a Harvard grad and world-class salesman) of an existing business model trying to manage in a world of increasing change and disruption. Microsoft executed its 20^th-century business model extremely well, but it missed the new and more important ones. The result?  Great short-term gains but long-term prospects for Microsoft are far less compelling.

In 2014, Microsoft finally announced that Ballmer would retire, and in early 2014, Satya Nadella took charge. Nadella got Microsoft organized around mobile and the cloud (Azure), freed the Office and Azure teams from Windows, killed the phone business and got a major release of Windows out without the usual trauma. And is moving the company into augmented reality and conversational AI. While they’ll likely never regain the market dominance they had in the 20^th century, (their business model continues to be extremely profitable) Nadella likely saved Microsoft from irrelevance.

What’s Missing?
Visionary CEOs are not “just” great at assuring world-class execution of a tested and successful business model, they are also world-class innovators. Visionary CEOs are product and business model centric and extremely customer focused.

The best are agile and know how to pivot – make a substantive change to the business model while or before their market has shifted. The very best of them shape markets – they know how to create new markets by seeing opportunities before anyone else. They remain entrepreneurs.

One of the best examples of a visionary CEO is Steve Jobs who transformed Apple from a niche computer company into the most profitable company in the world. Between 2001 to 2008, Jobs reinvented the company three times. Each transformation – from a new computer distribution channel – Apple Stores to disrupting the music business with iPod and iTunes in 2001; to the iPhone in 2007; and the App store in 2008 – drove revenues and profits to new heights

These were not just product transitions, but radical business model transitions – new channels, new customers and new markets–and new emphasis on different parts of the organization (design became more important than the hardware itself and new executives became more important than the current ones).

Visionary CEOs don’t need someone else to demo the company’s key products for them. They deeply understand products, and they have their own coherent and consistent vision of where the industry/business models and customers are today, and where they need to take the company.  They know who their customers are because they spend time talking to them. They use strategy committees and the exec staff for advice, but none of these CEOs pivot by committee.

Why Tim Cook Is the New Steve Ballmer
And that brings us to Apple, Tim Cook and the Apple board.

One of the strengths of successful visionary and charismatic CEOs is that they build an executive staff of world-class operating executives (and they unconsciously force out any world-class innovators from their direct reports). The problem is in a company driven by a visionary CEO, there is only one visionary. This type of CEO surrounds himself with extremely competent executors, but not disruptive innovators. While Steve Jobs ran Apple, he drove the vision but put strong operating execs in each domain – hardware, software, product design, supply chain, manufacturing – who translated his vision and impatience into plans, process and procedures.

When visionary founders depart (death, firing, etc.), the operating executives who reported to them believe it’s their turn to run the company (often with the blessing of the ex CEO).  At Microsoft, Bill Gates anointed Steve Ballmer, and at Apple Steve Jobs made it clear that Tim Cook was to be his successor.

Once in charge, one of the first things these operations/execution CEOs do is to get rid of the chaos and turbulence in the organization. Execution CEOs value stability, process and repeatable execution. On one hand that’s great for predictability, but it often starts a creative death spiral – creative people start to leave, and other executors (without the innovation talent of the old leader) are put into more senior roles – hiring more process people, which in turn forces out the remaining creative talent. This culture shift ripples down from the top and what once felt like a company on a mission to change the world now feels like another job.

As process oriented as the new CEOs are, you get the sense that one of the things they don’t love and aren’t driving are the products (go look at the Apple Watch announcements and see who demos the product).

Tim Cook has now run Apple for five years, long enough for this to be his company rather than Steve Jobs’. The parallel between Gates and Ballmer and Jobs and Cook is eerie. Apple under Cook has doubled its revenues to $200 billion while doubling profit and tripling the amount of cash it has in the bank (now a quarter of trillion dollars). The iPhone continues its annual upgrades of incremental improvements. Yet in five years the only new thing that managed to get out the door is the Apple Watch. With 115,000 employees Apple can barely get annual updates out for their laptops and desktop computers.

But the world is about to disrupt Apple in the same way that Microsoft under Ballmer faced disruption. Apple brilliantly mastered User Interface and product design to power the iPhone to dominance. But Google and Amazon are betting that the next of wave of computing products will be AI-directed services – machine intelligence driving apps and hardware. Think of Amazon Alexa, Google Home and Assistant directed by voice recognition that’s powered by smart, conversational Artificial Intelligence – and most of these will be a new class of devices scattered around your house, not just on your phone. It’s possible that betting on the phone as the platform for conversational AI may not be the winning hand.

It’s not that Apple doesn’t have exciting things in conversational AI going on in their labs. Heck, Siri was actually first. Apple also has autonomous car projects, AI-based speakers, augmented and virtual reality, etc in their labs. The problem is that a supply chain CEO who lacks a passion for products and has yet to articulate a personal vision of where to Apple will go is ill equipped to make the right organizational, business model and product bets to bring those to market.

Four Challenges for the Board of Directors
The dilemma facing the boards at Microsoft, Apple or any board of directors on the departure of an innovative CEO is strategic: Do we still want to be a innovative, risk taking company?  Or should we now focus on execution of our core business, reduce our risky bets and maximize shareholder return.

Tactically, that question results in asking: Do you search for another innovator from outside, promote one of the executors or go deeper down the organization to find an innovator?

Herein lies four challenges. Steve Jobs and Bill Gates (and 20^th century’s other creative icon -Walt Disney) shared the same blind spot: They suggested execution executives as their successors. They confused world-class execution with the passion for product and customers, and market insight. From the perspective of Gates there was no difference between him and Ballmer and from Jobs to Cook. Yet history has shown us for long-term survival in markets that change rapidly that’s definitely not the case.

The second conundrum is that if the board decides that the company needs another innovator at the helm, you can almost guarantee that the best executor – the number 2 and/or 3 vice president in the company – will leave, feeling that they deserved the job. Now the board is faced with not only having lost its CEO, but potentially the best of the executive staff.

The third challenge is that many innovative/visionary CEOs have become part of the company’s brand. Steve Jobs, Jeff Bezos, Mark Zuckerberg, Jeff Immelt, Elon Musk, Mark Benioff, Larry Ellison. This isn’t a new phenomenon, think of 20^th-century icons like Walt Disney, Edward Land at Polaroid, Henry Ford, Lee Iacocca at Chrysler, Jack Welch at GE and Alfred Sloan at GM. But they’re not only an external face to the company, they were often the touchstone for internal decision-making. Years after a visionary CEO is gone companies are still asking “What would Walt Disney/Steve Jobs/Henry Ford have done?” rather than figuring out what they should now be doing in the changing market.

Finally, the fourth conundrum is that as companies grow larger and management falls prey to the fallacy that it only exists to maximize shareholder short-term return on investment, companies become risk averse. Large companies and their boards live in fear of losing what they spent years gaining (customers, market share, revenue, profits.) This may work in stable markets and technologies. But today very few of those remain.

In the 21st Century an Execution CEO as a Successor Increasingly May be The Wrong Choice
In a startup the board of directors realizes that risk is the nature of new ventures and innovation is why they exist. On day one there are no customers to lose, no revenue and profits to decline. Instead there is everything to gain. In contrast, large companies are often risk-averse engines – they are executing a repeatable and scalable business model that spins out the short-term dividends, revenue and profits that the stock market rewards. And an increasing share price becomes the reason for existing. The irony is that in the 21^st century, the tighter you hold on to your current product/markets, the likelier you will be disrupted. (As articulated in the classic Clayton Christensen book The Innovators Dilemma, in industries with rapid technology or market shifts, disruption cannot be ignored.)

Increasingly, a hands-on product/customer, and business model-centric CEO with an entrepreneurial vision of the future may be the difference between market dominance and Chapter 11. In these industries, disruption will create opportunities that force “bet the company” decisions about product direction, markets, pricing, supply chain, operations and the reorganization necessary to execute a new business model.  At the end of the day CEOs who survive embrace innovation, communicate a new vision and build management to execute the vision.

Lessons Learned

• Innovation CEOs are almost always replaced by one of their execution VPs
• If they have inherited a powerful business model this often results in gains in revenue and profits that can continue for years
• However, as soon the market, business model, technology shifts, these execution CEOs are ill-equipped to deal with the change – the result is a company obsoleted by more agile innovators and left to live off momentum in its twilight years

A shorter version of this article previously appeared in the Harvard Business Review.

Filed under: Corporate/Gov't Innovation | 125 Comments »

Alexander Osterwalder invented the Business Model Canvas, co-founded strategyzer.com and was the lead author of Business Model Generation which sold a million copies in 30 languages.

Alexander and I often collaborate on new ideas for corporate innovation.  Here’s his guest post on what bad habits to avoid inside of a company.

Big companies have great execution habits to manage and improve successful business models and value propositions. But the habits that foster execution can easily kill new growth initiatives inside your company.

Bad Habit #1: The current business model dominates the agenda
In most companies the future suffers at the expense of the present. Companies are great at improving their existing business model and value propositions, but fall short when it comes to inventing entirely new business models, value propositions, and growth engines. In fact, by the time a company realizes it needs to reinvent itself for future success, it’s often too late. This happens because managing the present often takes oxygen away from inventing the future. Rita McGrath, a Columbia Business School professor says, “there’s pleasing today’s customers and there’s developing tomorrow’s business.” You need to be excellent at both.

Remedy: Create a protected space in your org chart where you invent and test new business models and value propositions. Equip this “space” with power and prestige. Become an ambidextrous organization — one that is excellent at managing and improving your existing business, alongside inventing new ones.

Bad Habit #2: One-size-fits-all decision making hurts speed & inventiveness
Companies that grow in size and scale proven products and services can quickly fall into a trap of slowness, unthoughtful risk aversion, and failure to experiment. As Jeff Bezos puts it, one-size-fits-all decision making “hurts speed and inventiveness” inside large organizations. In fact, Bezos constantly adjusts Amazon’s culture to ensure that the company never slows down and loses its entrepreneurial and nimble approach to finding future business success.

Remedy: Amazon distinguishes between non-reversible decisions with substantial sunk costs (like e.g. investing in a new warehouse in Amazon’s case), and reversible decisions like experimenting with a new offer. The former requires slow and careful decision making. The latter requires speed and agility.

Bad Habit #3: Insisting on untested and detailed business plans
Most established companies require detailed business plans for new ideas. This results in carefully crafted and thought-through documents with detailed spreadsheets and a great focus on how an idea will be implemented. However, the first goal of an innovator should not be to think hard about an idea and describe its implementation. First and foremost, an innovator’s job should be to rapidly, cheaply, and continuously test and adapt ideas until there’s enough evidence from the field to prove they will work. Only the latter helps avoiding big flops because it systematically reduces the risk and uncertainty of new ideas. Business plans actually maximize the risk of failure because of the focus on executing an unproven idea rather than testing it.

Remedy: Use business plans only for execution of existing businesses. Don’t ask innovators for business plans. Instead, implement processes that force innovators to systematically prototype and test ideas, reduce risk and uncertainty, and ultimately provide the evidence that an idea will work and is worth doing.

Bad Habit #4: Opinions matter more than evidence
Senior leaders acquire a lot of knowledge and experience about their business over the course of their  career. Unfortunately, this knowledge may be irrelevant when it comes to new value propositions and new business models. For example, the knowledge that Kodak’s leaders acquired during their successful decades in analog film didn’t equip them for digital photography. Quite the contrary. The rules to compete in the digital age are completely different. That’s why it’s so important for companies to “get out of the building” and interact with customers. Steve Blank, father of the Lean Startup movement, stresses that you will never know enough about your customers if you are holed up inside a boardroom. A good idea might still be a bad idea because customers don’t care about it. Michael Schrage, a research fellow at MIT, emphasizes that “a testable idea is better than a good idea”.

Remedy: Educate leaders that judging ideas for new value propositions, business models, and growth engines requires evidence from the field rather than just “expert opinion” from leadership. Implement processes that judge ideas based not on how they look, but based on the evidence from the field that support them.

Bad Habit #5: Outsourcing customer discovery and testing
Large companies have a habit of hiring outside agencies to do market research and customer discovery. That’s dangerous when it comes to developing new value propositions, business models, and growth engines. You can’t hire outside professionals to test and learn from customer interactions and make decisions for you. New ideas require many rapid iterations between prototyping, immediately testing with customers, and then deciding how to adapt your idea based on the acquired insights.

Remedy: For radically new ideas you should defer hiring outside agencies until you’ve found product/market fit. Instead, roll up your sleeves and internalize the hard work of rapid prototyping, testing, learning, and deciding. Third parties can help you with the process, but they can’t do the work for you.

Bad Habit #6: Senior leadership too busy for hands-on innovation
Senior leaders are very busy and time pressed people. Typically, they see the “getting out of the building” to test ideas with customers as a task to be performed by subordinates. But leaders have to be more than just sponsors of new business ideas. Decision makers are the ones who can make things happen. They are the ones who need to feel the market and talk to (potential) customers to learn that some of their initial assumptions or strong opinions might be completely wrong. Equipped with these market insights they can help move things faster.

Remedy: Distinguish between senior leaders who manage the present like running factories, and senior leaders who are involved in creating the future and need to “get out of the building”.

Bad Habit #7: Obsessing about competitors rather than customers
Unfortunately, many companies are more obsessed by their competition than their customers. Your customers are far more important than your competitors. Your (potential new) customers can tell you how to beat your competitors. Customer have the evidence your organization needs to validate or invalidate new business ideas and potential growth engines. That doesn’t mean you should completely ignore the competition. After all, business models and value propositions aren’t designed in a vacuum. However, competitors should not be your primary focus. As Steve Blank says, “You can’t drive forward by looking in the rear view mirror.”

Remedy: Obsess over your customers first when developing and testing new value propositions, business models, and growth engines. Then, evaluate how these new ideas perform in the competitive landscape.

Bad Habit #8: Focus on technology risk at the expense of other risks
New business ideas face many different risks. The California design firm IDEO distinguishes between three types of risk when they assess prototypes: desirability, feasibility, viability. Desirability is about the risk of your customers not being attracted by your new value proposition. Feasibility is about technology and infrastructure risks. Viability is about financial risks. We added a fourth risk, adaptability. Adaptability is about the risk of a business model and value proposition not being fit for evolving external factors, like competition, technology change, or regulation (risk: external threats).

Remedy: Make sure you test all four types of risks: desirability, feasibility, viability, and adaptability.

Bad Habit #9: Innovation is career limiting
In many companies being an innovator is not an attractive career path. First, in most organizations any type of failure is seen as a negative for your career. Yet good innovation processes require rapid experimentation and failure to gain insights, adapt, and ultimately succeed. Second, corporate incentives are geared to rewarding execution, where failure is not an option. Third, in most companies, innovation is still seen as a department for pirates and “the crazy ones” who really add no value to revenue and profit. And finally, prestige in companies is measured by who commands the largest budget and staff. But great innovation programs always start small.

Remedy:
Create different incentive systems for the people focused on execution, and the people focused on innovation. Make innovation a prestigious job in your company. After all, the innovators are ensuring your organization’s survival in an age of constant change.

Bad Habit #10: Innovation is siloed from Execution
Companies struggle to get the “execution engine” and “innovation engine” to collaborate, rather than to compete. Rather than realizing that managing the present and inventing the future are equally important and should be equally resourced, they often fight for the same resources. Often the execution engine deprives the innovators from access to valuable resources like customers, brand, or skills. That means the innovators end up competing without any competitive advantage against the more nimble and agile startups.

Remedy: Create a culture where executors and innovators collaborate because they understand each other’s value to the organization. Create processes and incentives that grant innovators access to customers, brands, and skills so they can outcompete the more nimble and agile startup ventures.

Bad Habit #11: Integrating new ideas into the execution engine too quickly
New ideas are fragile and they need to be carefully nurtured and scaled before they are integrated into the execution engine with its rigid processes, key performance indicators rules, and procedures. If you integrate new ideas before they fully mature you might kill them. For example, Nespresso, the successful daughter company of Nestlé, only survived and thrived because they were physically distant from Nestlé’s headquarters.

Remedy: Protect new ideas until they fully mature; for example, like in Nestlé’s case, by locating the project outside of the company’s headquarters.

Join Alex Osterwalder at the Business Model Canvas Masterclass in San Francisco, Nov. 3 – register here

Filed under: Corporate/Gov't Innovation | 8 Comments »