Creating options in a complex world: Peter Hinssen interviews Haydn Shaughnessy

Peter Hinssen : It is no secret that the pace of change is forever increasing, but which current evolutions will have the most impact on our organisations?

Haydn Shaughnessy : I’ll mention one in passing that you will be very familiar with, Peter. I think more established companies will adopt disruption as a strategy. We’ll see a lot more risk-laden business plans from companies that already have a successful track record and which have executives who have been on the receiving end of disruption.

Moving on from that though, externalisation is an important one. The relationship between an organisation and its environment has transformed completely over the past thirty years. So it is only natural that many of the key processes of our businesses – and certainly those related to our IT infrastructure – are increasingly externalised. We do this in order to manage the complexity of this fast-evolving world. Google, for instance, has developed its business in an almost wholly externalised manner since about 2003. It works with heavily structured external communities. Maps, Adsense, Adwords, Android, Robotics… all of them are highly ecosystem-dependent. So many of its activities involve organising complex hubs of very skilled people. A lot of successful organisations, like Apple, use that very same model. To externalize is to give executives the mental bandwidth they need to do proper continuous strategy development.

A second force to be reckoned with is the maturing of the open source movement. I am not just talking about open source software, which has obviously produced some really big breakthroughs. This approach has been spreading fast to other sectors as well. Like the open source distribution mechanisms of the Bitcoin phenomenon in finance, for instance. Or the open engineering communities, which will have a huge impact on manufacturing, possibly even more so than 3D printing. I expect the open engineering community to develop something radical, like a whole new computing paradigm in product design. You’ll see it over the next three years, and one result will be a totally new level of diversity in product customization.

I do believe these branches of the open source movement are now able to grow very fast because the philosophy behind open source has matured for so many years in the software environment. Think about BitCoin and how it is basically money-as-code. It took a huge amount of trust in the global money-as-code community to make this a reality – and it took a huge amount of opportunism. The trust factors have been built up over 40 years and new sectors of the economy, like finance and engineering, are now benefitting from that. But the sense of opportunism won’t go away. Ready-made global communities, free and easy to access, are a powerful new force in the economy – a point I make in my new book `Shift’.

The fact that open source operates on a global basis – with many different people involved – is extremely important. This makes the innovation that comes from it much more unpredictable than say the innovation that comes out of Apple or Google. It is almost impossible to foresee the next Bitcoin, or the next Ethereum. The latter, for example, is completely redesigning the way the Internet functions. Yet, it is ‘just’ a couple of guys that raised $14 million by offering shares solely through the Bitcoin community. Suddenly ‘regular’ smart people have the capacity to bypass the capital community in this way. You simply create the currency that you, in turn, use to pay for your project. It’s a huge, huge development that goes largely uncommented in the popular press. This type of phenomenal wildcard is happening more and more, which makes it increasingly difficult for traditional companies to cope with their environment. There is innovation, disruption and then the wildcard, like BitCoin. Companies need to figure out the disruption maps, the Mercator picture of what is happening, so that they can keep pace with what might come next.

In the end though, I would say that the real change is with people, not with technology. Externalisation is made manageable by technology but it’s a people-driven process and the open source movement is a very ideological movement, it is built by belief, which is the most human of needs.

Peter: Companies that want to stay relevant and be successful need to adapt to their environment. I believe that, just like the outside world, they have to become a network. They have to – among other things – flatten their hierarchies, focus on sharing, collaboration and transparency and cherish a culture of experimentation and failing fast. How do you see organisations evolving to keep ahead?

Haydn: Yes, I believe in the network too – it’s like oxygen. Still, you need some structure and some ability to organise economic activity at scale and that’s where I think the platform comes in. I think of the platform as an organizing hub – part software, part management skill, part ecosystem, part transaction engine. It’s what we see at Apple and Google; it’s a little of what we see from Uber and Airbnb. These are companies that really take a utility role by organising economic activity.

Having the ability to think and act like a platform, and use the utility business model, is key. A platform organisation can become a focal point for the diverse kinds of innovation that are going on in their environment. Secondly, if you want success today you have to be able to manage these massive ecosystems. Just to give some examples: Apple has 800 million accounts, Facebook 1.6 billion users and Whatsapp has 450 million. A lot of these companies are managing communities on a scale that would have been wholly unimaginable 10 years ago, and many old economy companies struggle to grasp it even today.

On top of that, organisations need the capacity to manage and develop a very broad range of options for how they play in the market. That is how you differentiate yourself from the competition. Not by “being more creative” as a lot of leaders seem to assume but by being able to see all the possibilities and by having the right cards in your hand ready to play at the right time. Like Samsung and Google. They are now involved in telco infrastructure in different ways, which is not what others would describe as their “core business”. Google has Google Fibre, project Loon, The Home Network, etc. Samsung, for its part, is now a market leader in 5G tech development as well as being involved in white space experiments. The latter is actually shifting its business towards infrastructure. These are options that cost hundreds of millions of dollars – most companies do not have the planning and decision models that allow them to make that kind of investment, and that is why they will lose out.

They will see stiff competition come along and try to make their judgments based on old ROI models. But – by the time they get a new service through their innovation stage-gate process – they will be overtaken by companies that have pre-existing options. They will also see their markets transformed by companies that see no vertical barriers and typically act horizontally – want to be modern? Think of horizontal adjacencies.

Peter: These are radical shifts for many companies, certainly the ability to look beyond core business and see options. What characteristics do they need to transform that way?

Haydn: Most companies still invest based on a simple projection of a total, addressable market and the kind of market share they can safely expect in that industry. This is obviously a very linear way of addressing the future, by projecting existing products and services into it. Today, thousands of business opportunities lie ahead of us. Linear thinking is a horrid match in such an environment. We need a completely different approach to management and investing. For me, the big missing dialogue in business is not the IT-Business dialogue; it is the IT-CFO dialogue and the business-CFO dialogue.

Having strong leaders, who think in terms of options, is key. The banking industry, for example, sadly seems to miss those. They just keep trying to be better at what they already do and that is frankly dangerous these days. But a good starting place is to begin working with adventurous CFOs who will help develop new investment models, who will revamp the company to orientate it around downstream revenues and allow the company to move away from product margins. A CFO who knows how to do this and still presents a solid balance sheet to the markets is like gold. And, of course, they need to invest in better cash management and improved treasury functions. In short, a CEO who can inspire the CFO to innovate is becoming increasingly important.

Companies also need to shift time horizons. Just look at what it took for Samsung to develop its successful OLED displays. At one stage its OLED display team was involved in no fewer than 200 separate innovation projects just to get OLED to work commercially. This is the kind of systemic scaling you need if you want to come up with something that is radically new. Yet, most companies still perform innovation in a very structured way and increasingly base it on a plethora of crowdsourced ideas. Forget it – think, instead, about how you can disrupt markets. Transform the supply chain. Create new ecosystems.

Peter: Why do most companies keep innovating in the traditional way? Budget constraints? Fear? Or just plain and simple habit?

Haydn: Mostly habit. Most managers are educated to stick to the core competency of the organisation. Whenever they feel threatened, they pull everyone back in and say “let’s focus on the core business now”. But truly smart companies say “let’s see how many options we can create”.

A massive example in failure of core competency management is Blackberry, before John Chen became the new CEO. At a certain point, Blackberry’s Management focused on just 1 thing: producing a smartphone competitive with Apple’s iPhone, one that would also be able to compete with the new Chinese manufacturers. They failed because they never gave themselves options. Chen understood this. He realized that the company had much more potential than just developing smartphones. For instance, it owns this incredibly effective, embedded operating system with the thinnest and smallest software footprint on the market. Blackberry is very fortunate to have found a CEO that has a sense of strategic options. In my view, that is the one characteristic management teams need. It is a tricky one, because it means changing how you look at investments. You have to dare to put money in uncertain experiments that might not work.

Peter: So you think today’s leaders need to be able to see options instead of focussing blindly on the core and to realize that traditional investment models will just no longer cut it. What else should they be able to do?

Haydn: As traditional esteem systems – focused on hierarchical position and office size – are losing their popularity, peer leadership is growing in importance. A lot of organisations are moving away from a military inspired type of managing and their leaders behave as being `first amongst equals’. Aaron Levie, CEO of Box, for instance, frequently sits in on coding and programming strategy meetings. The people in those teams are better at coding than him. He knows this as well as they do and he has no problem with them challenging him when he’s wrong. People such as Aaron earn the right to lead because they are respected, not just because of their rank.

Also, good leaders know how to create a convincing transformational narrative. It is extremely difficult to tell a story about change that does not alienate their markets, suppliers, partners and employees. Great leaders offer a narrative that allows their stakeholders the space to change. That is one of those crucial make-or-break skills which I don’t think you can really learn.

Peter: Today “the crowd” has become a formidable force, one that disrupts entire industries. How big is its impact on companies in your view?

Haydn: Most organisations over-depend on expertise. That is not the right way, I feel, to anticipate the future. We have abundant evidence that experts don’t predict the future any better than non-experts, within certain limits that is. Surely a biochemist would know more than the rest of us about the direction of alternative antibiotic cures, but once you get into the realm of human experience, it seems that the crowd is at least as good a judge and probably better. The crowd can offer a useful counterweight to expertise when it comes to decision-making and information management. I personally want to do more crowd-based disruption mapping and strategy planning and have been working on some tools for that. I think companies should embrace the crowd as a source of edge-like information and they should help structure crowd-opinion.

Crowdfunding could be the best way for large organisations to develop new products. I frankly see internally driven product launches as a thing of the past.

So yes, the crowd is powerful, but we should never mistake that for the force of the ecosystem. A lot of companies function in industry-wide ecosystems. Just think of the mobile chip design ecosystem around ARM. The latter, effectively, is an evolving knowledge base for chip design, and device designers and manufacturers contribute to ARM’s growing knowledge base (and, in return, benefit from it). This kind of structured credit and debit ecosystem is very powerful.  

Peter: What is the best kind of innovation for today?

Haydn: Organisations should go beyond the currently ‘hip’ way to deal with innovation. Betting on many projects, setting up their own labs or accelerators, using some kind of LEAN innovation and ideation program, and adopting fail fast-fail cheap mechanisms: this is just not enough. They need to see options and, at the same time, be much more selective about which projects they are investing in, and how much.

Companies also need to understand that innovation needs investing in people and that cutting costs in that area will be detrimental to their future. Yet this is exactly the area where most companies try to save money today.

There are two main types of innovation: doctrine-type innovation programs and strategic innovation. Many banks expanded through doctrine-type innovation in the noughties: they performed many acquisitions and were able to incorporate those new companies fast because they used an efficient strategic model. This is quite impressive because so many companies tend to stumble after they go on large M & A programs. But this doctrinaire innovation has its limits. You can see that with Santander: it has lost huge amounts of money on its asset portfolio, it’s under criminal investigation in some areas, and there were serious questions about succession. A company like this has succeeded wildly but I question its ability to incorporate an options philosophy into its doctrinaire approach. That might hurt it if change doesn’t come fast now. Most importantly, I think companies are beginning to realize that growth can be counter-productive and that innovation has to add to longevity; it needs to keep you alive.

Those who adopt a more strategic approach to innovation usually have a strong sense of what the disruption vectors are, up ahead. They have a transformation narrative. They are aware of what is unfolding. I should add, as I said at the start, that increasingly they are able to adopt disruption as a strategy. They are able to create the options they need to compete successfully in a market where different types of change emerge all the time.  They try to take control of the markets they operate in and change the marketplace to suit them.

This is a habit of mind for some companies. Google, for instance, thinks very strategically about where the future lies and has been investigating strategic options within the robotics space. Would you bet against Google becoming a category leader in robotics?

Intel, too, is entering robotics with an attempt to become a consumer-centric, home-made robot.  This first mover advantage gives them experience in what consumers want, how they can forge a long-term relationship with large bodies of consumers, how they can use their chips in the future, what the demand profile for embedded processing products might be….

They are all looking into options, even if there is no immediate payback and they cannot put a solid business plan around it. There is no linear relationship between “when we do this, we are going to earn that” when you are going all out for radical change. That is when you are truly strategic about innovation, that’s when you are moving beyond the traditional terms of business. To do all that though you need new decision models, and decision modelling is a neglected area. I think we, as advisors, should be developing these kinds of tools – we need disruption mapping, we need capability indexing and we need new decision modelling techniques. We, too, must innovate.

More info about Haydn and his book can be found here.