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Most change initiatives fail. Statistics from MIT research suggest that for leaders managing change the ‘capability trap’ is the single major failure mode. So, what is this trap, how is it set up and, more importantly, how to avoid it?
As a quick disclaimer, the charts and examples are schematic and simple to get my point across. This is a blog, not a textbook.
New leaders get appointed to solve a business problem such as improving poor results of sorts. So from the start the new guy or gal is under pressure to perform and succeed. In politics the common public expectations are to see result or bold actions within the first 100 days – and business is not known for being less demanding.
So, soon enough the new leader faces a tough decision. Which choice do you favor?
“Worse before better” means doing “the right thing.” However, this approach may not deliver sustainable results fast and is a hard sell to impatient or less reasonable superiors.
“Better before worse” is a less stellar route to reap short-term benefits and lessen the immediate pressure but it comes at a price: knowing that the this choice is not sustainable and will cost more later down the road.
By the way, this is really not rocket-science but straight-forward logic yet many executives still get seduced by the low hanging fruit, namely “better before worse”… so stay with me for a moment to see what happens next.
“Better before Worse”
It starts out easy: you cut cost all over the place and look like a hero immediately. For example, you could reduce machine maintenance or cut the employee training budget. Schematically it looks somewhat like this:
What happens is that not only your balance sheet looks better quickly, you also increase productivity short-term. The machines keep running and people keep on working, so in the short-term you produce the same output with less input.
Productivity and the Capability Inertia
The problems arrive with a delay when ‘capability inertia’ starts kicking in. So here is what happens: You didn’t maintain the machines yet the machines keep working – for while. Then, they break really bad and it takes a lot more money to get them fixed than having them maintained. It’s like not putting oil in your car’s engine and driving on – somewhere down the road the engine will die on you. You will have to spend money to fix it and live with the downtime while fixing the machines.
At that time you find yourself in deep water and all your previous savings go up in smoke together with what else you didn’t budget for.
On the people side with employee training, for example, the effect is quite similar but often less obvious: You save the money for keeping them up-to-date with new technology, skilled, etc. and saved short-term. The real problem is your staff losing its professional capabilities to continue to perform on a high level in the face of competition or adapting to changing markets and environments. External focus comes with a cost of doing business – that you just eliminated, thereby fostering group-think and internal focus. Getting the crew back in shape later on takes effort and is expensive: not only will you have to train them but also they are unproductive during the training period.
With it comes the ‘leaky pipeline’ effect where valuable talent leaves. It is the best people who leave first (see How to retain talent under the new workplace paradigm?) if they see sweeping cost savings affecting critical investments in the company’s future capabilities and not surgically cuts. Talent does not wait it out on a sinking ship. If you are unfamiliar with the horrendous costs of turnover, check with your Human Resources person to get a sense for your burn-rate!
Despite all of this, many managers still embrace “better before worse” as the scenario of choice and believe they are “doing it the right way”.
Rewards for all the Wrong Reasons?
Unfortunately, performance and compensation frameworks in mature organizations usually support this easier approach. ‘Success’ is typically measured quarterly or yearly as a basis for bonuses, raises or promotions. The typical incentive systems don’t take long-term sustainability into account enough (other than stock options for publicly traded companies, for example) to change behavior.
Instead, rewards keep getting handed out on a short-term basis of evaluation. Research showed many times over that this approach simply doesn’t work for more challenging jobs of the 21st century. Don’t believe it? – Check out Dan Pink’s famous 18 minute TED talk “The Puzzle of Motivation” relating to the candle problem and motivation research.
As a bottom line, if don’t plan to hang around to ride out the consequences of your choice (or even have a golden parachute ready), “better before worse” appears an attractive shortcut to short-term success. Deep down, however, you know it was not the right thing to do. Your staff, your successor, and sometimes the entire company will suffer and face the consequence when you are gone. – So what could you do instead?
“Worse before Better”
There is an alternative choice: the stony road of “worse before better” by doing what is right. For leaders accepting responsibility this may be the only choice.
Right from the starts is gets tough: you increase cost to invest where things need to change most, be it people or technology. For example, invest in getting the best people to do the job and train them as well as you can for the challenges to come and step out of their way. Establish or overhaul technology, processes and managerial framework needed to deliver results reliably.
This takes time and money, so as you would expect, productivity suffers at first but then, if the change is executed well, recovers and quickly exceeds the additional costs by far while you deliver outstanding results reliably.
It is important here not to address all problems at one time but to prioritize and tackle change in smaller steps. Mind that change is a development process that doesn’t lend itself to shortcuts.
While this is clearly the more sustainable strategy the tough part is getting your stakeholders and superiors to buy in (especially if they are looking for short-term “better before worse” results) by setting realistic expectations. After all, “worse before better” is a sustainable basis for a business model where “better before worse” is not.
You may also have to accept not receiving the short-term performance incentives for doing the right thing if your incentive system does not reward building capabilities. However, there are other kinds of meaningful rewards to consider. They range from feeling good about withstanding the temptation, doing good for the company and its employees, as well as possibly getting attention from more forward-thinking parties who may want to hire you in the future as a leader with guts and brains.
It’s not only successful innovations that can get shut down (see “Shut down! Why Successful Innovations Die“) but also those that don’t get a chance to take of in the first place: In the small print of Microsoft’s recent announcement to eliminate 18,000 jobs (mainly in the light of the Nokia acquisition) you could also find 200 jobs cut to end the Xbox Hollywood aspirations.
After a history of failures entering the hardware sector, Microsoft struck gold with its powerful Xbox gaming console series powered by popular games such as the epic HALO. Long forgotten seem the times of the “PocketPC” handheld to rival the PalmPilot or the “Zune” MP3 player to dwarf Apple’s iPod. (Let’s keep the Surface tablets with its awful Windows 8 mosaic tile interface out of the equation for now – even a recent promotion is just a sad parody.)
Without doubt, the Xbox is a success, Microsoft’s media flagship. It faces serious competition, so creative and disruptive solutions are needed to dominate the console market.
To expand on this solid Xbox console foundation and fend off competitors, the idea was to produce engaging and original video content. This added value would expand the Xbox platform to broaden Xbox attractiveness and deepen customer loyalty by appealing to its gamer audience in new ways. The gap between gaming and film converged over the past years when new game productions became sophisticated, quality productions with celebrity actors and voice overs, music by top Hollywood composers, high-end visual effects and not only budgets to rival studio movie productions but revenue exceeding blockbuster movies.
Inspired by, for example, Netflix’s success in producing original content such as “Orange” and “House of Cards,” this strategy looked very promising. Well equipped with CBS’ highly accomplished Nancy Tellem and ties to Steven Spielberg, the Microsoft Hollywood team of 200 was up to a great start – or so it seemed.
Two years in, however, the there was very little to show for, so Microsoft finally divested.
– What went wrong?
A key inhibitor for the Hollywood team, so it turned out, was clashing organizational cultures between Microsoft and the quick-paced and decision-friendly media world Tellem was used to from CBS. Nanny Tellem learned the hard way that effectiveness of decision-making at the lower hierarchical levels and fast execution was not the strong suit of the established culture, red-tape processes and deep hierarchy of the Redmond software giant. Down four levels in hierarchy under the CEO, Microsoft’s convoluted processes diluted Tellem’s authority and effectiveness. It slowed down decisions to a point where the ambitious and energetic start-up became practically shackled and impotent to operate effectively in the media world.
Even the best strategy cannot be executed when unaligned with organizational culture or, as Peter Drucker has put it so famously, “Culture eats strategy for breakfast.”
Culture is what most employees say and do routinely. It translates into a company’s processes, structures, systems, etc. This is why failing to understand or outright ignoring culture can be so disastrous for leaders. From my experience, the magic sauce is in aligning corporate culture and strategy with the passion of competent employees.
Microsoft’s Hollywood adventure is just one more example how disruptive innovation struggles when measured and governed by processes of a mature and bureaucratic organization with matrix structure. With reigns held too close and not leaving room to experiment, innovation suffers, as this missed opportunity for Microsoft demonstrates.
“Hindsight is 20/20” people say and in all honesty, other factors may have contributed too, but looking at it from the outside, perhaps this train wreck could have been prevented had Tellem paid closer attention to the culture of her new employer and ‘how we do business around here.’
Cultural fit with conductive structures and processes downstream are serious business factors that often get overlooked and then backfire for the blind-sided executive. – Only perhaps there could have been a proper Hollywood ending.
After all, disruptive innovations is a delicate flower that needs some room to flourish – especially in mature organizations.
Why successful innovations get shut down. WhIle we expect unsuccessful initiatives and projects to get shut down, what sense does it make to stop hugely successful ones?
Punished Despite Success
It doesn’t make sense to shut down profitable programs – or does it? It happens all the time when the current yet wilting business model still tastes sweet. Investing in building a disruptive, future business model appears less palatable as it takes uncomfortable transformation that comes with investment cost and lower profits initially. The sobering reality is that short-term gains often win over long-term investments, sustainability and bold moves to explore uncertainty and white space.
Here is a quick example from the fossil oil and gas industry straight out of Bloomberg Businessweek, “Chevron Dims the Lights on Green Power” (June 2-8, 2014): Chevrons renewable power group successfully launched several projects generating solar and geothermal power for over 65,000 homes. Despite margins of 15-20%, the group was surprisingly dissolved earlier this year after they had just about doubled their projected profits from $15 million to $27 million in 2013, the first year of their full operation. – Why would you kill a profitable new business?
Clashing Business Models
As for reasons for the shut-down, a former Chevron employee and Director of Renewable Energy notes that Chevron’s core businesses, oil and gas, still remain more profitable than renewable energy. This development signals that Chevron’s leadership is willing to experiment with renewable energy but does not seem fully committed – it makes Chevron’s slogan “Finding newer, cleaner ways to power the world” sound like lip-service.
Instead, Chevron continues to hold on tightly to their old business model to squeeze out the last drop of oil. Chasing short-term profit margins may prove not only a questionable path for long-term company sustainability but also from a business model perspective. While oil and gas prices have been on the rise for the past decades, it is well-known that these natural resources become scarce, so extraction from more challenging locations becomes increasingly expensive. It cuts into the company’s profits and the consumers’ pockets. To date, Chevron already pays a higher cost for extracting oil compared to competitors.
Chevron focuses on the upper tail of the S-curve of the current technology instead at the expense of preparing for the disruptive jump to the next technology platform. (See section “Technology S-curves” in 10x vs 10% – Are you still ready for breakthrough innovation?)
The risk here is to lose out on developing and acquiring new technologies that will be the make-or-break competitive advantage in the industry’s future.
Interestingly, Chevron’s competitor and largest oil company, Exxon-Mobil, takes a different approach. Even after initial setbacks where proof-of-concept did not scale to industrial size, Exxon-Mobile now partnered with Craig Venter’s Synthetic Genomics to produce oil from micro-algae at industrial scale. Hopes are high that this bio-tech and bio-agriculture approach proves more practical, profitable and sustainable to replace fossil fuels in the future.
Sounds risky? It sure is, but with profits from oil and gas still in the tens of billions this is the time to invest heavily in the jump on to the next technological S-curve. You may recall Craig Venter as a most successful entrepreneur and also the first to sequence the human genome, so there is no shortage of top bio-brainpower, which opens the flow also for more investment capital.
Truth being told, several other bio-fuel ventures of this nature exist all around the world. Neither made it to produce in industrial scale needed to satisfy the world demand for crude oil – yet. There is no question, however, that the world is running out of affordable oil and gas at accelerating speed. Disruptive technologies will emerge to fill the gap and redefine the energy sector.
The learning here is that even profitable disruptive ventures get shut down at times when the leadership is comfortable and holds on tightly to the existing business model they are familiar with and doing what they always did rather than taking transformative steps to prepare the organization for the future. Even with the writing clearly on the wall, the way of how profitability of a new venture is measured and the (still higher) margins of the established business (fossil fuels) make short-term focus attractive despite concerns over business model sustainability. So often enough there is little patience to further develop even successful, transformative ventures of tomorrow in favor of enjoying the sweet but wilting fruits of today.
Somehow this short-term mindset painfully reminds me also of the established car industry who, obviously, had little interest to bring electric vehicles to market at scale over the past decades until a Tesla comes around to show them how it can and should be done.
As for our example, time will tell whether Chevron or Exxon-Mobil made the better choice in the long run to win the new business model race leading us into the post-crude oil era – or if they both get disrupted by an even different new technology altogether.
Large organizations have vast resources – but this advantage inherently bears also a disadvantage: like large dinosaurs, with increasing size and maturity they lose the ability to adapt quickly to a changing environment as their smaller competitors can to seize business opportunities.
The Big Three
Let’s first identify the three typical obstacles that large organizations struggle with before we address how to disrupt and overcome them as intrapreneurs. The task at hand is to spark new energy, employee engagement and business growth opportunities in alignment with business strategy and company culture. By the way, if you are new to intrapreneuring, see also The Rise of the Intrapreneur and the Top 10 posts for Intrapreneurs.
So, these three big hurdles are the
Vertical Disconnect: Ideas from the bottom of the hierarchy do not find their way vertically to the top anymore to get implemented.
Horizontal Divide: Functional silos separate the workforce horizontally which limits putting to effective action the full potential of the company’s resources and diversity in a concerted way.
Inertia: More talking about change than taking action opens a widening gap between ideas and their implementation, as it is so much easier to lean back and improve incrementally than taking risks of major changes. Red-tape and ever mounting bureaucracy does its part to keep the wheels from turning and breeding a mindset of mediocrity.
These obstacles combine to form an unfavorable ecosystem of stagnation by containing innovative thoughts from growing and ripening, by inhibiting innovators to take action with passion and by blocking courageous action necessary to drive the organization’s future success and –possibly- survival.
Sketching a future innovation ecosystem
Here is what it takes to break the crust in order to reinvigorate and nourish innovation to flourish once again by creating an innovation-friendly ecosystem:
1. Vertical cut: Connect grass-root ideas with executive sponsors
A mechanism is needed to pipe fresh and promising ideas in an appropriate format from the grass-roots to find their way to executives, where the ideas get recognized, sponsored and put into motion for the better of the company. This holds true for disruptive break-through ideas in particular and in contrast to the continuous incremental improvement (see also 10x vs 10% – Are you still ready for breakthrough innovation?) that typically makes up most of the organizations day work.
Don’t be mistaken, executives worth their salt seek good ideas like the air they breathe. They are generally more open to necessary change and course corrections than one may think. The executives also hold the keys to feeding the ideas back into the machinery of the larger organization to get implemented.
A mechanism is needed that allows cutting vertically through the red-tape and hierarchical boundaries of the mature organization. It creates a pipeline of ideas that connect the top with the bottom of the organization and everything in between with intrapreneurial passion.
2. Horizontal cut: Connect across functions and geographical silos
Large organizations tend to foster functional (and geographical) silos to increase efficiency, quality, and reliability in their operations (again, see Leadership vs Management? What is wrong with middle management?). This, however, effectively inhibits ideas of game-changing nature to flow freely and being developed with input from diverse perspectives to the benefit of the larger organization.
A wise saying goes: “Innovation happens at the intersection of disciplines.” It is these diverse perspectives and adding brains to a problem that help to improve and develop an idea to become more robust, innovative and feasible. Thus, a mechanism is needed to effectively cut horizontally through organizational walls to allow employees to effectively collaborate, network and connect the established silos and islands.
3. Tangible results: Bridge the “Idea to Implementation” gap
In the end, what we to achieve is giving good ideas a chance that otherwise would never get considered or implemented – especially in a mature business environment that favors low-risk incremental improvement over more risky breakthrough experimentation (see 10x vs 10% – Are you still ready for breakthrough innovation?).
We need a mechanism that frees the intrapreneurial spirit of employees and directs the passion and potential of our employees’ ideas to tangible results that, ultimately, drive new business growth.
How does it work?
The intrapreneurial instruments and mechanism of this innovation ecosystem include, for example:
School for Intrapreneurs,
Internal corporate venturing,
Networks for implementation and
Opening to outside perspectives.
Over the next blog posts I will address each of these approaches (and perhaps more) and share my experiences from implementing exactly that successfully in a FORTUNE Global 500 company. So, check back soon or get updates via Twitter @OrgChanger.