“None of these are pathological companies,” Anil K. Gupta told The Wall Street Journal in December 2014 after IBM, Walmart and other big companies posted disappointing financial results.
Prof. Gupta is the Michael Dingman Chair in Strategy, Globalization & Entrepreneurship at The University of Maryland’s Smith School of Business. He attributed the difficulties of such companies to having adopted “sticky” technological systems, business processes and other resources.
“That’s what makes you successful,” he continued. “That also essentially locks you into the current paradigm. You become big, but you become trapped.”
Anxious to learn more about the structural problems facing what Richard Foster of Yale University has called “Methuselah’s” (CIMS Innovation Management Report Nov/Dec. 2014), IMR proceeded to interview Gupta.
The edited excerpts:
IMR: You have stated that complacency and arrogance are the two biggest challenges established companies face, and that they are very much the result of past success and growth. How so?
Gupta: When you’re at the top of your game and have beaten the competition, you have a right to believe you can remain ahead. But the complacency comes in when you assume that the game itself will not change and that new competitors will not come after you. Arrogance is very much part of the problem; it is what creates complacency.
IMR: How is this complacency related to the stickiness of resources you talked about with The Wall Street Journal in December?
Gupta: The two challenges are slightly different in the sense that the complacency and arrogance appear when the company becomes blind to the possibility that new and very different types of competitors may enter and change the rules of the game dramatically.
I call this type of problem a pathological disease that companies like GM, Sears and IBM fell prey to in the 1980s. They could have avoided such a disease if they had been humble and paranoid. When Andy Grove of Intel wrote his famous book, Only the Paranoid Survive, this was exactly his point. On the other hand, when I talk about non-pathological companies that get into trouble, I am referring to companies that are aware of how the game is changing and want to change but find that the change is very hard.
Consider the emergence of Tesla. It’s hard to imagine any car company that’s not aware of the future of electric cars and what Tesla is doing. But the capabilities that Tesla is bringing to the game are so different from the capabilities around combustion engines that it’s not at all easy for the traditional car companies to do what Tesla is doing. Some companies, like Toyota and Mercedes-Benz, have signed agreements giving them access to Tesla technology through the partnership route. That’s a way out of the stickiness of their resource base, such as their technology, where their factories are located, their supplier networks, and so forth. But for a lot of companies, this is a serious challenge.
Or consider brick-and-mortar retailers such as Barnes & Noble. I don’t think Barnes & Noble took Amazon lightly. I think it saw what was happening. But a company like Amazon doesn’t need any of the resources that are connected to the physical retail book business; it builds on completely different resources.
For a Barnes & Noble, its allocation of resources and the capabilities and the culture and the people that it has hired are all extremely sticky; it can’t really turn the ship around all that easily and certainly not very quickly. That’s what I mean by sticky resources.
IMR: In a recent interview with McKinsey Quarterly on corporate reinvention, Lou Gerstner, the former IBM CEO, stressed how the capacity to change is what’s important, not staying with what you’ve got. That sounds to me like stickiness.
Gupta: Absolutely. There are two parts to change. One is sensing the need for change, and the other is the ability to respond appropriately and adequately. These are the foundations for the survival and evolution of any organism, be it a living organism or an organization.
The problem that pathological companies have is on the sensing front. They’re basically blinded by their arrogance and complacency. They don’t sense the need for change until it is too late. The point that I made about sticky resources pertains to challenges on the response front. When your resources — both tangible and intangible — were critical to your success to date but, going forward, success will require very different resources, then it’s like asking a lion to become a zebra or an elephant.
IMR: In contrast, you’ve probably seen another group of companies that are adopting a high degree of humility. Do you believe this is becoming the new corporate norm. How does that show itself?
Gupta: I think today’s big companies have observed and learned from what Sears and others went through in the 1980s. The Googles of this world realize that complacency and arrogance can almost be the kiss of death. A good example would be Microsoft in the late nineties. I remember an interview with Bill Gates, who said something fascinating. He said, “We are afraid.” But then Gates talked about who or what he was afraid of. He said, we are not afraid of the competitors whom we know, who we can see and whom we have beaten. Who we’re really afraid of are the two guys in a garage that we don’t know about.
Of course, Gates was very prescient because those two guys in the garage happened to be Larry Page and Sergey Brin. He was so right about them. He said, “That’s who I’m afraid of.”
So, the Google founders, or Zuckerberg and Facebook, Oracle and other companies, or even some in traditional industries, having seen what they have seen, have learned to be afraid of “those two guys in a garage.”
I would say, in general, that across the world of large companies today, there is a certain degree of running scared that we didn’t see a couple of decades back. I attribute this new fear to greater technological dynamism, which enables new players to come onto the scene, even in an industry like oil.
The Exxons and Chevrons of this world were not the pioneers in hydraulic fracturing. It’s the marginal players, the nontraditional players, that did it. So whether it’s the traditional or the more dynamic industries, companies recognize that disruption can happen to anybody.
IMR: You’ve anticipated my closing question: What would you advise managements of large companies looking at the world today? To be afraid of the two guys in the garage?
Gupta: Yes, absolutely. But my advice has three parts to it. Number one, in your current business, never stop innovating. That’s a little too obvious, but very important.
Number two, focus not just on plan A — i.e., what we should be doing differently or better over the next three to five years—but also to think about how a newcomer could enter and totally disrupt your game. Alongside a Red team that would focus on developing plan A, you also need to create a Blue team that would focus on the second question. The focus of the Red team should be to improve the current business as part of your normal strategic planning process. However, the focus of the Blue team should be to figure out how you could become a disrupter yourself.
If disruption is inevitable, it is much better that we do it ourselves rather than find ourselves at the receiving end of someone else’s attack. You need to remain paranoid about how you could be attacked. Build in your response as an explicit part of your strategy process.
That doesn’t guarantee that you have looked at everything, but it will make you more alert, more humble.
Number three, and Google is a good example here, manage the company simultaneously along three time horizons:
- One, how can we do today’s business better?
- Two, what new things are outside our existing business but close enough that we should do them? If we don’t do them, then somebody else will do so and use that as the launching pad to gain entry into our current business.
- Three, what could be the “moonshot” types of things that we might consider doing. Look at Google X, which Sergey Brin runs. It’s really a very creative skunkworks.
You need to live in these three time horizons simultaneously.
IMR: You say it is obvious that the current business should never stop innovating. But in past economic slowdowns, that was the first thing many companies would cut. They would cut their research and their innovation efforts. Do you think they’ve learned not to repeat that in the next slowdown?
Gupta: At the level of the entire economy, yes. Comparing 1990 to 2010, I think that, in most industries, the percentage of Fortune 1000 companies that would cut R&D in tough times is indeed declining.
Companies are learning. But that’s not the same thing as saying that all companies have learned their lessons. There are still companies that take too much of a short-term perspective. They haven’t learned. They should.
IMR: Thanks, Anil.
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