M.R. Rangaswami: Investors and corporate leaders are working to respond to all the industry disruption we are seeing. Why is it so hard for them to catch up?
Frode Odegard: Mature enterprises face challenges on four fronts: (1) their existing lines of business are subject to merciless technology disruption; (2) consumers will rely on machine-curated reviews to choose products and services; (3) the next generation of innovators are not excited about climbing the corporate ladder; and (4) investors are concerned about the potential to create future value.
We are now in a transition to a post-industrial civilization, characterized by increasing control of inorganic and organic matter coupled with machine-powered decentralization in management and governance. Mobile devices and the consumer Internet have enabled new business models where we can provide access to assets and service providers without owning or employing them. Such businesses are cheaper and faster to scale. They provide end-user convenience and consistent service experience, leading to greater brand power. Most importantly, they cause a structural change in industries.
Classical disruption theory postulates a new value network replacing an old, but we think of what is happening as a reshaping of existing value networks, with new firms gaining in power and incumbents becoming commoditized. More capital than ever is available for young innovators seeking to disrupt industries.
Small firms can be scaled globally without becoming asset heavy or employing large numbers of people. Enterprises are working hard to meet this challenge. They are engaging with startups through corporate venturing, running accelerators, establishing innovation outposts, and establishing internal innovation programs. They are investing significant resources in training and bringing in consultants. However, research shows that enterprises are mostly focused on modernizing their operations and upgrading existing offerings with new technologies.
Most corporate innovation efforts are inwardly focused or incremental. The fundamental problem is that while we are transitioning to a post-industrial economy, enterprises are still dominated by industrial-era management thinking. We urgently need a new management science with tools and practices suitable for a post-industrial transition.
M.R.: What will post-industrial management science look like?
Frode: Industrial-era management thinking was born in the factory and peaked with schools such as Lean Thinking. It assumed ideals such as long-lasting firms, long employee tenures, developing employees over time, and leaders engaging employees as problem solvers. Sophisticated enterprises like Toyota developed a social contract — the company provided job security and professional development, nurturing people as critical thinkers and problem solvers.
Employees, in turn, developed and created customer and shareholder value. However, now we are seeing shorter firm lifespans, shorter employee tenures, professional development is increasingly decoupled from firms, and software/machine learning is eating a lot of human problem-solving work. We need to rethink our assumptions about management. Our research focuses on three primary areas: (1) the changing nature of jobs and firms; (2) how industries are being reshaped; and (3) how entire economies and societies are changing. The latter is already the source of heated conflicts. The way we think about organizational design and the relationships between people and firms needs to change dramatically.
In Silicon Valley, the world’s leading cradle of disruption, the average job tenure in startups is 10.8 months. Industrial era management thinking emphasized long-term stability as a virtue, but new firms are probably best viewed as temporary projects. If you compare Hollywood with Silicon Valley you will find many parallels. Talent matters, everything else is infrastructure for the creation of new intellectual property. As WhatsApp and Instagram illustrate, firms can be tiny and still create tremendous economic value. We will be seeing more just-in-time, short-lived, highly automated micro-organizations. They will simpler, faster and more agile than large enterprises. Routine management work will be eaten by software.
Distributed ledgers and smart contracts will let us standardize the interfaces between firms and link them together in a trusted fashion. The complexity challenges we now see in large enterprises firms will move to networks of smaller firms. Organizational design will simple, but inter-organizational design will be the next challenge.
Much of our research focuses on how industry structures are being disrupted. Mature industries have stable structures; incumbents have won through disciplined operations, listening to customers, and consolidating gains through M&A. Now they are facing technology-savvy competitors from outside their industry who are better able to take a fresh look at industry structure.
What Amazon is doing to retail is an example of this. There are clear patterns of disruption that recur across all industries as they are reshaped for greater capital efficiency. The infusion of AI into not just routine work, but also creative knowledge work and the coordination of work, will have big implications for how we think about management and leadership. Leaders will find themselves having to manage teams assembled for shorter periods of time. They will have to spend more time and energy on formulating compelling visions that will appeal to distributed networks of teams.
We will also see AIs as economic actors, learning to identify opportunities for value creation, and marshaling resources in response. Uber drivers experience this already. Amazon’s Alexa shows how agents will accumulate brand power as they curate and recommend products. As the instantiation of micro-organizations becomes more automated, we may see AIs creating them. The interplay between humans and AIs will be a core aspect of business and our culture at large.
M.R.: What practical steps should enterprise leaders take now to go beyond incrementalism and accelerate corporate renewal?
Frode: Thus far enterprises have mostly been playing defense with respect to industry disruption. They should continue to modernize their operations, but they really need go on the offense and creating new businesses. Incremental innovation won’t be enough. Enterprises must become disruptors themselves, and not just in their own industries. As startups are showing us, every industry is now free game. This is going to require a much bolder response by boards and executive teams than what we are currently seeing.
Incumbents in mature industries occasionally do engage in impressive feats of industry disruption. One of our clients, a major European airline, spun off an online-only consumer bank. A couple of years after being taken public it was worth more than the parent company. It had less than a hundred employees at the time. Unfortunately, these instances seem to be one-offs. Enterprises must systematically attract and mobilize innovators to build new businesses. We have identified an organization design we call “the higher-order organization”. The firm becomes a platform for building disruptive new micro-organizations.
Higher-order organizations combine in-house resources, a methodology for spotting disruption opportunities, and the recruitment of innovators as co-founders. This is a very different relationship from that of an employee. Enterprises won’t be alone in setting up higher-order organizations. Idealab in Los Angeles/NYC and Moonwalk in London are examples of higher-order organizations set up as such from scratch. We believe higher-order organizations will become a new hybrid asset class, attractive for LPs who want access to venture, but with a less random success pattern.
Enterprises must hurry while their resources, brand presence, and market access remain competitive advantages. Many mature enterprises have modest operating margins and may find it difficult to set aside adequate resources for renewal. This may require some work on the Investor Relations side. Difficult choices must also be made soon about accelerating work automation to free up resources for corporate renewal. Finally, many leaders feel overwhelmed as they navigate a maze of initiatives. Bringing in experts who can provide a post-industrial perspective and practical tools will be critical to success. At the end of the day, of course, nothing will happen until leaders commit to bold action. Transformative leaders must lead from the front lines – or lose the war.