Where speed, innovation, technology and strategy collide

An old saying, often attributed to a Chinese philosopher, goes something like this:  may you live in interesting times.  Some people say that it isn't a "saying" so much as a subtle curse.  Interesting times - interesting to whom?  Interesting why?  I think we are all about to find out what interesting times look like, because those times are about to unfold, and no one can really interpret the repercussions.

Major shifts on the horizon

Why are times about to become more interesting?  There are a number of reasons, many of which I've listed in the title of the post.  Currently we have national and global economic tension, the rise of nationalism, large trading communities breaking apart (Brexit) and trade tensions between large trading partners - the US and China for example.  Old trading patterns and rules of engagement may be re-evaluated or may change entirely.  Digital transformation - a "third wave" of information technology that creates an entirely new way to capture real time data and perhaps make sense of that data on the fly, could radically change how businesses operate, how they make money and how they interact with customers, consumers and suppliers.  We aren't quite certain yet how IoT, Blockchain, cryptocurrencies, artificial intelligence, robotics and other technologies will change things.  All we can say for certain is that these technologies and the digital transformation they create will change things.

While these shifts are underway, other forces are at work.  The pace of change - a common refrain in my writing - seems to only accelerate.  Large companies, built over centuries, are brought low overnight.  Small companies formed in spare bedrooms in a very short period of time have the same valuation as large hospitality chains in operation for decades.  In a digital, asset-light or asset-less model, companies can scale exceptionally quickly, and larger firms with decades of development seem somewhat stuck with their legacy investments.  Data is becoming a new currency, more meaningful than the products we acquire or services we use.  As more people gain access to the internet and gain more education and more experience interacting and creating connections, more data is created and more interactions and business is transacted, leading to more interesting data and more connections - thus more value for the companies managing and tracking that data.

Impact on strategy and innovation

What does this mean for two concepts near and dear to my heart - strategy and innovation?  If strategy is a "plan of action designed to achieve a major aim" then what should our strategies look like as we encounter a competitive environment with little stability and a significant amount of change?  What should our "major aims" be?  I doubt Zuckerberg ever dreamed he'd have control of so much data, and that the data would be so valuable, when he set out to create a "facebook" of college classmates on line.  The Facebook of today wasn't his original strategy, any more than the Google of today was what Page and Brin where thinking when they started a search engine.

But businesses need clarity in their strategy in order to direct resources, to align people to key opportunities, to operate at peak efficiency.  We will need new strategy, and maybe even new strategic tools in order to operate under these new conditions. 

And where there is strategy, there should be innovation, and the reverse is almost always equally true.  Innovation is simply a method of achieving some portions of strategy - typically focused on growth or differentiation, or entry into new markets or segments.  Not everything that is strategic must be executed through innovation, and not all innovation is strategy.  Innovation should have an important place in the pantheon of strategic tools and methods, and when strategy is difficult or unclear, innovation becomes even more difficult to define and achieve.

What's next?

Thus it is with some concern that I look at the confluence of increasing speed, digital transformation, global trade unrest, increasing customer demands and think:  what are the new strategies that allow businesses to compete successfully in an environment with so much change and uncertainty?  If businesses cannot create reasonable strategic plans, then how can they effectively create new innovation programs and activities?

This lament is focused primarily on large corporations, which have deep experience and legacy investments.  There was probably never a better time to be an entrepreneur or startup, a company with one compelling innovative idea, because with new digital tools and technologies and ready access to large markets, we'll see more startups grow quickly and scale to compete with larger corporations, constantly slicing off valuable customer segments or markets or geographies much faster than ever before.  We may arrive at the juncture where large corporations request more oversight and protection from their regulators and government officials, just to make it more difficult for entrepreneurs to enter and compete.  Patriotism, after all, is the last refuge of a scoundrel, according to Samuel Johnson.  Increased oversight and regulation will sustain larger firms that cannot move quickly but will to some extent stymie innovation.  But not for long.  In some instances services will spring up that consumers demand, ahead of regulations - look no further than the regulations trying to catch up with electric scooters or AirBnb.

The reality is, we are going to need new strategic thinking, and new strategic models, to face all of the change that is about to unfold in the next 10-20 years.  It's entirely possible that

• many jobs will disappear, with humans replaced by robots.
• new trading partnerships will form, old ones disappear
• new energy sources shift the focus of global economies
• green thinking shifts where we place emphasis and resources
• digital transformation shifts how we build companies
• national and international politics and power shift dramatically

We'll need strategies that envision the future, that enable more speed, flexibility and agility in the business model and structure, and that work at the same speed, if not greater speed, than changes in the customer base and the market.  We'll need new tools and methods to understand what is going on and put it into context.  We'll need to get much closer to customers and consumers, engaged with them as we aren't today.  We'll need to rethink how we innovate - it could be that all we do is innovate, given how short product cycles are likely to be in the future.

We will definitely live in interesting times, very soon if not already.  How we as strategists and innovators begin to understand these times and create tools and frameworks to help companies understand and act much more proactively is going to matter a lot.

Beware conventional wisdom in innovation and digital transformation

One of my favorite quotes comes from Shaw, who said that all change in life originate from unreasonable people.  Reasonable people, he said, will accept the status quo and change their lives to adapt to the status quo.  Unreasonable people won't.  Unreasonable people force change rather than accept the status quo.  So, he argued, all change is dependent on unreasonable people. 

So it's interesting to me to read a completely reasonable list of "things to do" before implementing AI or any of the new digital transformation toolkit and think:  that's absolutely correct in theory and likely 100% wrong.  I thought that when I read the article entitled 3 Steps to Gear up for AI and the future of work.  The advice is meaningful and probably useful, conveyed thousands of times about new technologies or new approaches.  It advocates:

1. Determine a Use Case for the new technology or approach
2. Train people to be more proficient users of the new technology
3. Start small - find small successes

This advice was true for the following list of management concepts:

• ERP
• Lean
• Agile
• Six Sigma
• Doing business on the internet

 and I suspect many, many more.  It's not that conventional wisdom is wrong, it's just that there may be situations where the conventional wisdom may not be correct.

For innovation and digital transformation, perhaps we should be a bit more unreasonable.

Digital Transformation

First, we've skipped a step.  We need to define what digital transformation is, or what we think it is.  I'll define it as the implementation of a number of technologies (like AI, machine learning, blockchain, IoT, robotics, big data and so on) which transforms business processes and strategies.  Since each technology has a multitude of potential use cases, from generating new products and services to increasing revenue to cutting costs, we should be more circumspect about what the value proposition and use case is.  And, since most new technologies enter the mainstream market by creating greater efficiencies, perhaps we should more accurately ask:  what significant customer need can it address, or what significant inefficiency or cost can it remove? Further, how important or significant should the need or opportunity be?

They don't call it digital incrementalization.  They call it digital transformation.   The same is true for innovation.  We need to be thinking bigger.  The time to conduct small experiments around the fringe is over.  We need to use approaches and tools like digital transformation and innovation to solve important and urgent efficiency and cost needs, or to resolve major customer needs.  There's your "use case".

And yes, I've combined my response to the "use case" point and the "start small" point into one lengthy paragraph.  If by now your company cannot use innovation or digital transformation to do some big things, to create interesting new products or business models, or to radically transform the customer experience, the end is near.  The time for starting small was 5-10 years ago while innovation and digital transformation were still relatively new.  You cannot compete with other firms that are doing much larger or bolder experiments because the cycles of learning and implementation are collapsing.

John Boyd said it best in his OODA loop (Orient-Observe-Decide-Act).  If a competitor can progress through this loop faster than you can, you are a target, not an adversary. Starting small, experimenting and then scaling up is valuable when the technologies or capabilities are still new.  When everyone is doing them, it's time to make bigger bets.  Corporations need to be more agile, yes, and experiment, yes, but also must be able to scale quickly and implement quickly.

Training

The article also advocates training.  There are several concerns I have with training, on new technologies such as AI or blockchain, or on innovation tools and methods.  While it always sounds appropriate to invest in training your people on tools and methods you need them to use, too often training isn't valuable or worse, it is wasted.  There are a couple of reasons for this.

First, training is the first corporate expense to get cut in lean times.  While deep, formal training is often valuable, it is also often hard to schedule and hard to justify. Training is never "top of mind" for people who are implementing technology, and is often difficult to acquire and schedule for those who should be using the new technology.

Second, training is often wasted in innovation work because we train people on innovation tools or methods but send them back to do their regular jobs.  If you want innovation training to be valuable, you need to train people on tools and methods they use immediately after the training.  Otherwise, don't bother, because the regular work cadence will soon cause them to ignore or forget anything new they've learned if they don't use it.

Third, training for digital transformation tools is also a bit difficult, because you first have to identify which method or tool you'll implement, what problem or need you are trying to solve, and how the method or tool creates insights or data or simplifies a process to solve the problem.  In many cases digital transformation may simply remove people from an activity, so the training they may need is training in a completely new role.  Other training requirements include the ability to implement the new technology - but it's probably better to hire this work rather than train people for it, and to be able to understand and assess the information that the digital tools create.  It's probably this last idea that is most useful, but also most contextual.  The insights that each digital technology provides and how the data is interpreted will be different in case by case basis.  It will require people with excellent data interpretation and contextual skills to interpret well.

What instead?

What if the right answers for innovation and digital transformation - at least at this point in history - aren't start small, train users and identify use cases - but instead the new conventional wisdom should be:

1. Address wicked problems head on with the goal of completely solving them, focusing either on radical cost reduction or dramatic improvements in customer experience
2. Think differently about training, in 3 dimensions:  buy the experience you need rather than train for it (technology), train people to understand the information presented by new tools and methods, prepare to train people for new jobs and roles once their existing jobs are eliminated
3. Start big and go bigger - the pace of change doesn't allow small, continuous experiments when technologies and capabilities are relatively mature.  Go big or stay home.

Perhaps the answer is to be unreasonable, to aim for the stars, rather than to settle for low earth orbit.

Why digital transformation will drive business model innovation

As a follow up to my previous post about the intersection of digital transformation and innovation, I wanted to conduct a thought experiment to illustrate why the real impact of all the impending change from digital transformation and innovation will be business model related.  While the implementation of new technologies is interesting and challenging, and creating new products and services is daunting, at least you can still do that primarily if not exclusively in your existing business model.  What happens when the business model is no longer viable?

Using GM as an example

To illustrate this point let's consider General Motors, or for that matter any car company.  These companies are the bedrock of the manufacturing prowess of the United States and other developed economies, and create jobs for the core company and for a long tail supply chain.  Does digital transformation and innovation have any potential impact on their business?  You be the judge.

Shift in car acquisition

If consumer tastes change and if autonomous vehicles (which are just specialized robots) become a more compelling offering, consumers will likely view transportation as a service.  Rather than acquire cars as assets with high prices and rapid depreciation, and ongoing maintenance, consumers are more likely to simply acquire rides.  Uber and Lyft are simply the transition point, where we use other people's cars to get rides.  As this movement gains steam, and autonomous vehicles gain traction, it's increasingly likely that individuals don't acquire cars, they pay for transportation or miles traveled.

This means that 1) the number of cars purchased is likely to fall, because the existing cars are used more efficiently and 2) individuals and families acquire fewer cars.  In this case the dealer network increasingly becomes obsolescent, and sales of new cars move to fleet sales.

Financing

If sales move from individual buyers to fleets, financing models change.  Most car companies make a profit from both the sales of the vehicle and also financing a loan.  If fewer individuals acquire car loans, financing profits fall.  If large corporations offer transportation services, the financing may simply be transferred to larger organizations, but those larger organizations will demand lower interest rates, making financing less profitable.  Thus the large automotive companies may take another hit from losing some financing margin.

Shifts in branding?

If you don't actually drive the car, do you care about its performance?  Most of us don't really take advantage of the zero-60 acceleration or tight suspensions of some higher end luxury cars anyway.  As the car becomes an automated commodity, how does BMW and Mercedes differentiate its autonomous vehicle from Kia or Hyundai?  The real battle will be on interior options and luxury on one hand, and utility and carrying capacity on the other hand.  How companies differentiate their cars and their companies will have to change.

 Supply Chain

During all of this transition to autonomous vehicles or ride services, digital transformation is also changing the supply chain.  Blockchain and IoT provide greater oversight into where components are made and sourced, and big data helps identify cost issues, leading to more pressure on the supply chain.  New technology entering the car to manage issues like lidar, steering, acceleration and so forth introduce new supply chain members which provide far more value than the traditional supply chain members.  Older members of the supply chain providing simpler components feel increasing pressure to automate and cut costs, while newer members bring far more technology savvy and agility.  The supply chain will be under increasing pressure to reduce costs while increasing technology and flexibility.

AI/ML
All the while artificial intelligence and machine learning are providing insights into consumer behavior and usage and identifying issues within the supply chain and the manufacturing process.  This means constant updates to how car parts and cars themselves are designed, manufactured and assembled.  Production lines are constantly reconfigured to adjust to new insights from AI and ML, which conflicts with older union work rules. 

What happens?

In the end GM and other car manufacturers may need to be able to survive selling fewer cars to a much smaller buying public made up mostly of corporations offering rides as a service.  They will differentiate through lower service costs and may lose much of their branding as autonomous vehicles become a white good, branded by the service provider.  The car companies will have to survive with lower profits from financing and flat to slowly decreasing sales.  The dealer network may become obsolete, and with enough 3-D printing and CAD modeling even the after market for car parts may become less attractive.

While this is a radical departure from GM's model today it is not that alarmist. Many of these conditions are already apparent and emerging or will occur shortly.  Digital Transformation, ubiquitous connectivity, the capacity to store, process and manage large data volumes and consumers shifting desires are already having an impact.  And this is just for the car companies.  We haven't even scratched the surface of the secondary and tertiary markets for fueling, insurance, driver's education, taxis and many other transportation issues.

Everything resolves at the business model.  GM can make money in any of these scenarios, but the business models for the way they operate today, and the way they may need to operate in the near future are exceptionally different.  Want to know why Ford and GM are getting out of the sedan business?  So they can make enough money on their trucks and SUVs to put a down payment on the dramatic changes that are necessary for them to survive.

Whether we are talking about digital transformation or innovation, everything resolves to the business model.  We need better tools and new ways of thinking about how the business model can and will evolve, and how to shift from the existing business model to the required new business models before these shifts occur.

At the digital transformation and innovation crossroads

I went to a meeting about innovation earlier this week with a former client and a discussion about digital transformation broke out.  It was both interesting and strange at the same time.  Most corporations are struggling to comprehend the changes in front of them, but at the same time are so fixated on short term thinking that they struggle to see the tsunami that is emerging just over the horizon.  They know it's there.  They know they should prepare.  They just don't have the time to consider it or the contextual frameworks to understand it.

Most larger corporations have arrived at a crossroads, and not by their own making or decisions.  Change is being thrust upon them.  As Gary Hamel wrote - ..we are the first generation in history where the pace of change has gone hyper-critical within our lifetimes.  In other words, most corporations are arriving at a cross-roads, not because of any strategic decisions or actions they took.  The corporations didn't change.  The conditions and circumstances did.  And what happens when corporations with business models and structures and governing capabilities built for slower change and market dominance meet the agile, nimble competitors and shifting customer expectations at this unexpected crossroads? 

Where innovation and digital transformation meet

Let's add in, of course, two really interesting management phenomena occurring before our eyes.  Innovation has been a watchword for corporations for about 20 years.  I've suggested previously that the innovation era began in roughly 1997, when Jobs returned to Apple and when Christensen published the Innovator's Dilemma.  From that time until this, innovation has entered management philosophy and has become an often cited if not always executed concept for large corporations.  Innovation has been around long enough to have lived through one or two generations of management, but it hasn't overcome the concurrent pressures of efficiency, cost reduction, outsourcing and a host of other activities focused on efficiency and effectiveness. 

Innovation seems almost "long in the tooth" and has less tangible outcomes than you might expect.  It meets the emerging digital transformation movement head on.  Digital transformation is inevitable.  Once we have enough devices and enough connectivity, consumers will generate more and more data, and corporations will find ways to use that data and create more connectivity.  Becoming digital isn't enough however.  Digitalization will just lead on to digital transformation - including the underlying technologies, better use of the data that is generated but more importantly radical change of business models.

Business models, channels, data and experiences

So where does innovation and digital transformation meet?  Perhaps in more interesting but in hindsight relatively obvious places.  The problem with innovation to date has been a fixation on product innovation, constantly updating or inventing new products, but with little exploration beyond the product.  What most people fail to realize about interesting innovators of the last 20 years is that they innovated products AND experiences AND business models.  And this is something that many people clamoring for digital transformation don't understand either - the ultimate and most important change will be in the...you guessed it, the business model.

Take for example the automotive industry.  Today most car companies make money selling cars (and make most profits in financing those sales) to individuals who own the car as an asset.  Families expect to have a house and two cars, which if we looked closely at usage we'd realize that most cars are used extensively about 2-3 hours a day at most.  The majority of the time cars are parked and unused.  No business would allow a valuable asset to be so underutilized.

Now, with autonomous cars families need fewer cars, because they can call on Uber, or an autonomous car service, and pay for usage rather than ownership.  This is a dramatic business model change.  The product is incrementally different - perhaps an electric engine and autonomous controls but still a car - but Detroit's business model will be different.  They won't sell lots of cars to lots of families and finance those sales to individuals.  They'll sell fewer cars to more service-oriented organizations with different financing needs. 

Business Models in the cross roads

Where innovation - a bit long in the tooth but not fully or adequately deployed in most organizations - and digital transformation - still an emerging concept that is really a number of technologies that are more or less ready for prime time - will collide, and where businesses will need to change, is in the business model.  Innovation has long argued that it has a role in business model change, but often innovation hasn't had the right to address business models.  Digital Transformation may seem like an IT oriented activity, but it will create change that impacts the business model. 

There's no better place to think about these two management philosophies and how they will work together than to think about how they'll impact the necessary business model changes that will be required in the next 5-10 years. 

Are you thinking about how your business model needs to change, to be more competitive as innovation, customer demands, competitive threats and shifts caused by digital transformation occur?  Product innovation will seem child's play by comparison, but business model change will be the real opportunity.

Why Apple can't innovate anymore

Yes, it is a provocative title.  And no, I don't quite know if it is true.  But it does make one stop and think, doesn't it?  What if the avatar for innovation over the last decade is exhausted?  What if Apple has done all the innovation it can do?  An interesting thought, wouldn't you say?

What Apple now has in common with other large companies

Innovation is easier when an organization is smaller and more nimble.  There's a reason why a lot of really interesting innovation comes from startups rather than larger companies.  Larger companies have masses of customers to keep relatively happy.  They have shareholders to placate.  Larger companies aren't all that comfortable with risk.  In many ways, in 20 years, Apple has shifted from a scrappy, nearly bankrupt company to king of its own hill.  And in many ways in that relatively short period of time it has shifted from a company that could innovate, to a company that has a lot of institutional barriers to innovation:

1. It is very large - and it appears size is actually a barrier to innovation in many cases
2. It is increasingly risk adverse - it wants to protect the market share it has
3. It has a lot of customers to keep happy
4. It has a platform and a brand to protect

Apple created a new platform - a nicely designed music player that led to a nicely designed phone that led to some nicely designed and crafted PCs and laptops.  But once each of these offerings reached a critical mass, and became mainstream products, it has for the most part stopped innovating, instead reaching for higher and higher margins.  Do we really need a cell phone that costs $1000?  I think in some ways Apple is ripe for Christensen's disruption - the disruption that comes from products or services that offer less.

What Apple has that other companies have less of

Note that while Apple has many of the institutional concerns of many other large companies, it does not suffer one of the prevailing complaints that other large companies use to explain why they don't innovate:  Apple has plenty of cash.  Billions of dollars of cash, with which it should be possible to fund new ideas, hire new researchers and scientists, acquire new startups.  Which makes one wonder - is Apple simply out of ideas?  Or, do they have so much to protect and defend that new innovation requires creating new products in markets or needs far from their core.

Beyond the Core

Apple succeeded because it created a new platform - the "i" series - that attacked core products and offerings of other companies (Nokia, Motorola, etc) and did not impact Apple's core products.  There was no cannibalization of Apple products with the iPod, iPad and iPhone.  Now, however, anything really interesting and new in any of these spaces puts Apple's hegemony at risk.  The question is - can Apple find a way to extend its "i" platform to needs and technologies far from its core - say in medical products as an example - to disrupt a distant market or industry and gain new revenues?  Apple surely does not want to disrupt its own highly profitable suite of products and services, so it has done something else that many companies like it have done before - shift into a defensive posture.

Apple is now defending the core, rather than innovating in adjacent markets.  20 years ago it had no choice - it had to take risks, explore new opportunities and risk a lot to grow.  Now, it has all of the infrastructure and institutional challenges that Nokia and Motorola had, and a far less aggressive management team.

Where will it innovate next?

As I've noted, Apple has all the capital it needs to gain entree into almost any industry or market.  The last few decades have given Apple a lot of panache and success, and its management team may not feel as though it can risk "failing" in a new market or industry, so its options may seem limited.  Plus, once a company gets large, small experiments, even when successful, don't seem all that meaningful.  Back when GE was a 'thing', Immelt asked for ideas that could quickly scale to $100M in revenue. If they couldn't get to that size quickly, the organization felt that they weren't important.  Perhaps Apple has a very high threshold for success in a new venture as well.

If these factors are true, then Apple can only experiment in a few industries, where the consumer experience isn't great, where there is an opportunity to win a significant market share and where their experience (or the experience they can acquire) can be quickly relevant.  There are a few markets or industries where this may be the case:

• Aging boomers and home health - boomers are already familiar with Apple, they like the interface and have money.  They may want better medical technology in their homes than they can get from traditional medical device companies today.  And they have money.
• Augmented reality - increasingly we will interact with the world in a very different way than we do today.  Our reality is already augmented by websites, news feeds and other data sources on our PCs, and our reality is augmented and shaped by our tablets and cell phones.  How and where the augmentation happens - on a device, in googles or glasses, in your home or auto - there are customer experience requirements, interface requirements and data requirements that Apple may be good at, and that no one "owns" today.

Why Apple is like a fruitfly

Scientists study fruit flies to learn about genetics because they are easy to study and their lifespans are relatively short, meaning we can see genetic traits passed down or changed over a short period of time.  Is Apple our technology and innovation fruit fly?  Does it shift from scrappy, almost bankrupt PC firm to industry behemoth unable to innovate in only a generation?  If so, can Apple spot and move to new markets and opportunities for new innovation, or does it settle down and slow down, starting toward a slow demise already?

And while we are using Apple as an avatar, doesn't everything about Apple's recent innovation challenges speak volumes about corporate innovation generally?  Large companies have risk adverse cultures, large customer bases to protect and serve, little understanding of markets beyond their core, and shareholders to keep happy.  What many other large companies lack is deep pockets that could fund innovation more easily.  If Apple, without that last disadvantage, can't innovate, then we may find that corporate innovation is distinctly incremental, and that most disruptive innovation will originate from startups, and large corporations will either acquire those innovations or be overwhelmed by them.