ASSERTING THAT THE PACE OF CHANGE IS ACCELERATING IS NOTHING NEW. That statement could arguably have started any article describing the challenges facing corporate leaders at any time over the past 150 years. Consider the broad changes the industrial and scientific revolutions unleashed. Trains, planes, and automobiles brought us closer together. Telegraphy wires and telephony enabled pervasive communication. Electricity changed the very nature of work and life. Modern medicine eradicated diseases, slashed infant mortality rates, and sharply increased life expectancy. Cities grew, crumbled, and surged again. The world of the business leader has always been uncertain, full of surprising twists and turns.

Yet, something today just feels different. Tightly intertwined markets mean ideas spread like never before. Ubiquitous smartphones, pervasive cloud computing solutions, and inventive platforms that provide on-demand access to just about everything allow companies to scale products and services faster than ever before. Unexpected competitors and fast-shifting customer tastes are upending established market leaders at an increasing rate. Business models that worked reliably for decades are struggling to deliver growth. Your customers today are unlikely to be your customers tomorrow.

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This level of change and unpredictability requires approaching strategic decisions in a new way. Traditional approaches are insufficient because they analyze the past to predict the future. They are facing in the wrong direction. This article draws on academic research and Innosight’s own field work to provide our suggestions about how to approach strategy through uncertainty. Our view is that today’s ambiguity brings tomorrow’s opportunities. Business leaders equipped to act in the face of uncertainty can build paths to growth that have not yet been imagined. They can own the future, instead of being disrupted by it.

Setting the Context

Harvard Business School Professor Clayton Christensen co-founded Innosight three years after the publication of his landmark book The Innovator’s Dilemma. The book famously described how innovators transformed existing markets and created new ones via simple, convenient solutions that Christensen dubbed disruptive technologies.

Technology-based industries immediately grasped the concept. You didn’t have to look far to see disruptive changes such as the shift from mainframe computers to minicomputers to personal computers to today’s pocket computers (otherwise known as smartphones), or the migration of software from being sold in packages to being delivered via packets over the Internet. “Software eats the world” is how Netscape-founder-turned-venture-capitalist Mark Andreessen put it, meaning that the force of disruption is rushing into every corner of the global economy. We’re particularly watching five key disruptive trends:

  • The rise of robots. Driverless cars and drone-based delivery are still years away from being fully mainstream, but rapid technological advancements and relentless experimentation by companies like Google and Amazon promises significant developments.
  • Additive manufacturing. In 2014, Harvard Business School graduate Grace Choi launched a new printer called Mink. It doesn’t print words or pictures on paper. It prints customized cosmetics. Imagine snapping a picture of a vibrant sunset and creating lipstick matching the dramatic orange hue. Any industry that makes, distributes, or sells things has to at least consider the impact of additive manufacturing.
  • Pervasive computing. Thomas Watson famously predicted in 1943 that there would be a world market for five computers. Today, the average person owns dozens of devices with microprocessors, ranging from wearable fitness trackers to smart thermostats to implantable medical devices that wirelessly connect with remote monitoring devices.
  • The science of life. Also known by the moniker big data analytics or the quantified self movement, increasingly instead of relying on flawed judgment and intuition we can make decisions based on statistically valid data sets (further amplified by pervasive computing). Whether it is Spotify recommending a song, Mint suggesting a way to cut your bills, or your Fitbit nudging you to take the stairs, life for many is becoming sharply more scientific.
  • Everything as a service. The world’s largest taxi company (Uber) owns no taxis. The world’s largest hotel chain (Airbnb) has no hotels. Even the world of consulting is being disaggregated. Want to rent a nerd for an hour? Go to Hourlynerd.com.

Management consultants. Automotive and medical device manufacturers. Shipping giants. Even the most seemingly staid industries are today forced to confront the challenges of disruptive change. In today’s world, no one is immune from the forces of disruption.

And this is great news.

As my colleague Clark Gilbert first highlighted in a Sloan Management Review article titled “The Disruption Opportunity” in 2003, disruption is the greatest growth opportunity you will ever see. Disruption grows markets. Consider photography. Eastman Kodak – which, ironically enough, invented digital imaging in the mid-1970s – struggled to transition from its traditional film business, going bankrupt in 2012. Did the world stop taking pictures? Of course not. People today take many more pictures than they did at any point in human history. They don’t print the same volume of pictures, of course. Rather they post them on Facebook, Snapchat, Line, Instagram, and so on. The industry has grown, but the business model has radically transformed.

Research shows that incumbents are increasingly seizing disruptive opportunities—thus averting being disrupted by others. Consider Major League Baseball. As the commercial Internet began to emerge, Commissioner Bud Selig convinced the franchises to centralize their Internet operations in a new entity called Major League Advanced Media. In classic disruptive fashion, MLBAM started simply, offering streaming audio broadcasts for people who had moved but wanted to listen to the team they fell in love with when growing up. With no other viable option, they embraced scratchy, Internet-delivered audio. After all, something is better than nothing.

Technology improves, as it always does. MLBAM started adding video clips and condensed games, where fans could watch 20 minute summaries showing all of the key plays in a game. Today, subscribers enjoy crystal-clear, HD-quality video. Revenues are projected to cross $1 billion this year, and MLBAM has developed such robust video streaming capabilities that third parties hire its expertise to manage their video streaming efforts.

Newton’s third law holds that every action has an equal and opposite reaction. In the same vein, every disruptive threat creates an equal, if not greater, opportunity.

Setting a Course with a Future-back Approach

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Imagine getting in your car with the hope of getting to an exciting new destination. You strap on your seat belt, press the ignition button, and set off. You fix your eyes … to the rearview mirror. It doesn’t take long before you rear end another car or end up in a ditch. You can’t move forwards only looking backwards, but that’s exactly what many organizations do in the face of ambiguity. They take what we call a present-forward view of strategy. That is, they carefully gather and analyze data, look for quantitative proof that an investment opportunity will bear fruit, and act. This approach is based on an implicit view that tomorrow’s world will look similar to today’s. It is a fine approach in static environments, but it constrains strategic choices in dynamic ones – consigning a company to extend today’s model even if that is the wrong strategic choice.

A future-back strategy, on the other hand, begins with the assumption that tomorrow will be different than today. It doesn’t mean taking a wait-and-see approach. Rather, it involves looking at powerful trends that hold transformational potential, coming to consensus about the future environment, developing shared aspirations about the company’s future state, and then making “stepping stone” investments to turn that aspiration into an achievable reality.

The first step in the process involves grabbing hold of the underlying trends that will reshape your company and industry. The best way to spot these trends is to live in the periphery. Where is that? It is the edges or fringes of your industry. That might be extreme customer groups, such as those in particularly demanding circumstances or those that have demonstrated that they can be satisfied with very little. It could be among people historically locked out of the market because they lacked skills, wealth, or sophistication. It might be the teenagers and hackers that love to create and play. In a business-to-business context it might be in smaller businesses, or businesses in poorer markets. The periphery certainly exists is in global innovation hotspots where new businesses incubate and early adopters proliferate, such as Silicon Valley, Shanghai, Berlin, and London. As legendary science fiction writer William Gibson famously noted, “The future has already arrived. It’s just not evenly distributed yet.”

Remember, disruptive change often starts small. For example, in 2005, I was giving a presentation at a leading cable broadcaster and highlighted the disruptive potential of YouTube. One audience member commented, “YouTube is great, but if you add up every video that anyone has ever watched on it, it is less than the lowest ranked show on a random Tuesday night.” True. In 2005, that was true. Within five years, YouTube was routinely getting more visitors daily than all the television networks combined. Anything growing rapidly bears attention. Karl Ronn, a Procter & Gamble executive who helped that company launch three $1 billion disruptions before leaving to create his own disruptive ventures, told us his rule of thumb is that “anything that has doubled is a potential disruptor, regardless of its current size.” About potential disruptors, he says, “They are running the test market we should have run. This is a simple way to not ignore small stuff.”

As you imagine the consequences of peripheral trends in the future, go beyond the firstdegree impact. For example, consider the driverless cars that Google, BMW, and others are working on. Obviously cars without drivers could change driving patterns, which could affect auto manufacturers. Presumably they will crash less frequently, which could enable dramatically different designs that are much lighter weight, affecting material companies. Lighter cars will get much better mileage, affecting gas companies. If cars don’t crash, why would we need auto insurance, at least in its current form? And what about local governments that earn revenue from handing out speeding tickets? Or urban planners that allocate prime real estate to parking lots? Finally, consider employment implications. One million people in the U.S. work as truck drivers. What happens when they are displaced by robots?

A future-back mindset fueled by a connection to the periphery brings the future into sharper clarity. It can never be perfectly predictable – Innosight co-founder Mark Johnson uses the metaphor of an impressionist painting – but it can be much clearer.

Aiming for Moonshots

How can you create the future you desire, rather than be swept away by powerful trends? Draw inspiration from John F. Kennedy’s iconic appearance in 1961 before a joint meeting of the Congress and the Senate. Months after the Russians had launched a man into space and looked positioned to win the next great world race, Kennedy made his famous and ambitious declaration:

I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the Earth. No single space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or expensive to accomplish.

And thus, the term “moonshot” entered the lexicon as shorthand for “a difficult or expensive task, the outcome of which is expected to have great significance.”

This was no idle, pie-in-the sky promise. Before making the speech Kennedy had Vice President Lyndon Johnson carefully study the feasibility of his goal. And, as Richard Rumelt described in Good Strategy Bad Strategy it was smart strategy as well. As Johnson explored how the U.S. could beat the Russians in space, rocket scientist Werner von Braun wrote a memo describing how the current lead the Russians had in heavy rockets made it hard to beat them in launching satellites or exploring the edges of the Earth’s atmosphere. However, getting to the moon required a 10-fold performance improvement over current technology. Here, the Americans had an advantage with broader and deeper technological resources.

fig1

The last area links to the final piece of setting a strategic direction: picking unfair fights. It has never been easier to start a company, and at least a handful of fast-growing enterprises like WhatsApp and Instagram (acquired by Facebook in 2012 and 2014 respectively) have demonstrated the ability to attract large user bases with almost skeleton teams. An incumbent that seeks to fight against hordes of attacking entrepreneurs needs to pick fights where it has unfair advantage because it has something that no startup could match. In a 2012 Harvard Business Review article titled “The New Corporate Garage,” I provided several case studies of large enterprises that had done just this, catalyzing tremendous growth by combining assets of scale with entrepreneurial behaviors. One story in that article described how medical device manufacturer Medtronic developed a new business model to make its pacemaker more affordable and accessible to Indian consumers. Specifically, the “Healthy Heart for All” program combined direct-to-consumer advertising, remote diagnostic clinics where hundreds of patients would be screened in an afternoon, and the world’s first loan program for an implantable medical device. Since the article was published, Healthy  Heart for All has spread throughout India, affecting tens of thousands of patients. In mid-2015 Medtronic announced it planned to launch Healthy Heart for All in the United States.

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The beauty of Healthy Heart, beyond its massive impact, is that Medtronic is one of maybe three companies in the world that could pull it off. It had regulatory clearance to sell its device in India. It had relationships with influential doctors in India. It has infrastructure in the notoriously difficult country. Its balance sheet allowed it to offer loans. A key ingredient to driving this kind of impact is leveraging unique, difficult-to-replicate capabilities. Companies rarely have precise clarity around this area. When asked, managers often respond by talking vaguely about their brand or their scale. Be specific. Find people who work for you who used to work for a competitor, and ask them what made them envious when they were on the “other side.” Or talk to entrepreneurs in your field, and ask what you have that they would readily pay for.

Owning the Future

A future-back mindset, grounded in today’s periphery, and informed by areas where you have unfair advantage sets a strategic course through uncertainty. But, as Harvard legend Joseph Bower notes, “the right strategy is never more than 49% of the problem.” The other half involves overcoming subtle, sometimes hidden, barriers standing in the way. Let’s take them on one at a time.

Fighting the “Shadow Strategy”

At a basic level, business leaders have two jobs to do. They have to make today’s business as strong and resilient as possible, or, in other words, deliver the present. And, simultaneously they have to create tomorrow’s business, or, discover the future. Losing the balance between the two can be deadly. Too much focus on today causes companies to miss industry-changing growth opportunities. Too little focus on today often leads to a crisis in the core, which after all provides both the cash flows to invest in growth and the capabilities to make it happen.

Part of the “and not or” mindset is recognizing that optimizing today and creating tomorrow are distinctly different disciplines. Making today’s business strong is an optimization exercise, involving detailed data and structured analysis. Creating tomorrow’s business is a discovery exercise, involving intuition and judgment grounded in structured experimentation. Easy enough in theory, but incredibly difficult to practice. While it sometimes seems like disruptive change blindsides market leaders, that’s actually rarely the case. Kodak invented digital imaging in the 1970s, newspaper companies pioneered digital media in the early 1980s, Nokia prototyped smartphones in the late 1990s, Microsoft saw but squandered the opportunity to own search advertising, and Blockbuster could have bought Netflix for $50 million. In all cases, good intentions and a sensible strategy ran into the buzz saw of what we call the “shadow strategy,” with the systems driving day-to-day resource-allocation decisions leading the market leaders to – largely unintentionally – perpetuate fatally flawed models to disastrous effects.

Big companies must regularly allocate four scarce resources: money, assets, rewards, and leadership time. Over time, the systems to allocate these resources – including budgeting, performance management, and strategic planning – get fine-tuned to optimize what exists rather than to create what doesn’t. Re-wiring these systems takes significant investment, so executives need to consider three near-term interventions to fight the shadow strategy:

  1. Isolate and disarm hidden carriers. There’s a reason why the best response to disruptive change is often to create a spin-off organization. Keeping new growth efforts separate from the day-to-day pull of the shadow strategy by creating separate budgeting, funding, and performance appraisal systems often is a sensible choice, as long as that isolation doesn’t deny the new venture the unique asset it needs to succeed.
  2. Actively arbitrate with a bias to the new. Isolation doesn’t work when the existing core and the new growth effort will have conflicting demands for a scarce asset. Sponsoring senior executives need to be ready to step in and actively arbitrate requests. Remember, the dominant gene in an organization is to perpetuate the past, so the bias needs to be to protect and nurture the new.
  3. Develop rules of engagement. The more an organization needs to drive growth repeatedly, the more the new will make repeatable requests to tap into something related to the core. To break the logjam, embed ad hoc arbitration in rules of engagement that determine when to follow core decision-making processes and when to follow a different approach. A portfolio management system is one form of this as it involves setting distinct criteria and buckets of funding for distinct types of projects. Generally, beyond-the-core innovation must be measured by different metrics, which brings us to the data barrier.

Creating New Data

In Innosight’s 15+ years, we’ve seen thousands of ideas, ranging from market-creating ideas from massive multinationals to everyday ideas from enterprises in emerging markets, to ideas from entrepreneurs to start new businesses to ideas from our own employees.

They are all the same.

Every innovative idea, and I mean every one, is partially right and partially wrong. The challenge facing the would-be innovator at what we call “the first mile of innovation” – that precious moment where you move a plan from paper to reality – is that it is impossible to know prior which part is which. Inside many large organizations, the default answer is to address this challenge through analysis. Run focus groups. Talk to industry experts. Sharpen the financial projections. Hold alignment meetings. Get everything lined up, and then launch aggressively. But then, the large company learns a truth taught by the American philosopher, actor, and occasional boxer Mike Tyson, who once quipped, “Everybody has a plan, until they get punched in the face.”

The punch the innovator takes is the plan that looked so rock solid on paper almost always looks like it rested on shaky assumptions when it meets up with real customers. The customer who promised they would buy actually doesn’t. The sales person who committed to pushing a new idea aggressively holds back instead. The engineer who promised they will ship on time gets distracted by other responsibilities.

To work around the problem, let’s go back more than 100 years ago and dissect how it was that a pair of bicycle repairmen from Ohio solved the problem of putting humans in the air. At the turn of the last century, people were obsessed with manned flight. Most would-be innovators worked diligently to create prototypes of their ideas, building contraptions that the hindsight of history would call crazy. Before the Wright brothers built a plane, they flew a kite. The great thing about a kite is when it crashes, no one gets hurt and it is easy enough to rebuild.

One of our clients in the toy industry flew a creative kite to test an idea about a new distribution channel. The company’s idea was to launch a line of kiosks in hospitals. After all, parents often arrive in hospitals without toys to distract kids, and kiosks were taking off in airports to distribute electronics, SIM cards for phones, and more. The company could have commissioned a custom kiosk and run a test in a few hospitals, but that would have cost hundreds of thousands of dollars. Instead it created a disaggregated kiosk for a few hundred dollars. A TV screen advertised products. Inventory sat on a table. An iPad served as order entry. And Alasdair did fulfillment. This was not some complicated Siri-like bot; it was our colleague who received a text message and completed the order.

The kite crashed. It turned out getting toys for kids was the last thing on parents’ minds when they arrived at hospitals. They simply took out their smartphone and gave it to their children. Sure, they wouldn’t win the parent of the year, but it did the job. This was a great outcome, because the company learned quickly and cheaply that its idea wouldn’t work.

To improve their kites, in 1901 the Wright Brothers combined a cardboard box, some bicycle spoke wire, and a fan, creating a wind tunnel to expedite experiments. Imagine how it felt to be able to run 200 experiments of 38 wing surfaces in two months! One underappreciated form of business wind tunnel is a thought experiment. Place yourself in the shoes of your natural competitor, and imagine how they might respond (also known as a “war game”). Repeat the exercise for a customer, channel partner, or sales force member. Imagine how an innovator you admire might tackle the problem. Ask “what would need to be true?” for an idea to be successful. These thought experiments don’t cost anything but can provide critical learning.

Kites and wind tunnels aren’t about getting and then analyzing past data. They are ways to create data to inform future decisions.

The Job of Leadership

Previous articles and academic literature have suggested the need for leaders to be “ambidextrous,” equally able to use their left and right brains or hands. We view it a bit differently. If you are ambidextrous and have trained your whole life to be a marathon runner, that won’t help you if you have to strap on skates and play ice hockey. The metaphor that we favor is to be a chameleon – to be able to seamlessly adopt a different guise depending on the context.

Take, for example, how to appraise a team’s performance. The first question a leader should always ask is: What type of game is the team playing? Sometimes teams will play games that look like roulette, where they spin the wheel and hope for the best. Smart leaders that recognize roulette is being played should punish teams, because they are taking poorly thought out risks. Sometimes teams will play games that look like chess, where outcomes are primarily based on skill. Leaders here need only to look at the results teams achieve to assess performance. And sometimes teams will play games that look like blackjack or poker, where the outcome of a given hand blends luck and skill. In these games – and innovation is clearly one of them – Michael Mauboussin in The Success Equation says leaders need to look at the process the team follows to assess performance.

It isn’t easy when you’ve spent your career perfecting a certain set of skills to develop the kind of fluidity described above. To prepare the confront challenges of ambiguity, leaders should seek to get first-hand experience doing something new. Inside an office context, that might involve working on a new product or business launch or finding a way to work in a different geography. Outside the office, that might be taking up a new language or developing a new skill, such as learning how to play an unfamiliar music instrument.

Leaders also should diversify their networks. We are taught to network through taking advantage of similarities to create connections. INSEAD Professor and leadership expert Herminia Ibarra notes that, “It is not uncommon for even the most superbly trained executives to have networks that are literally redundant because most of their contacts also know each other.”

To accomplish this, follow the guidance of Salesforce.com CEO mark Benioff. Benioff makes a point of developing an eclectic network. He has “reverse” mentors, like Drew Houston, the cofounder of Dropbox. “He grew up in the Internet. I didn’t,” Benioff said. “So he can see things in ways that I don’t.” He has an “inverse mentor,” someone who has a completely different set of experiences than you, in Black Eyed Peas superstar and music entrepreneur Will.I.Am. The kind of network Benioff has built is a vital component of owning the future, because it allows him to get diverse viewpoints on topics with no known answer, which experts say is critical to good decision making in uncertainty.

Three Mindsets for Strategists

As we’ve seen, uncertainty presents clear challenges to strategists. The approach detailed in this article can turn today’s ambiguity into tomorrow’s opportunity. As you begin your journey to own the future, rather than be disrupted by it, we suggest you commit to three key mindsets.

First, be optimistic. Disruption is a growth opportunity. Research by behavioral scientists show that when we perceive a threat, we grow very rigid. Gilbert’s doctoral research drew on that research to highlight how even companies that spot disruptive changes early, such as Nokia and smartphones, Kodak and digital imaging and U.S. newspaper companies and the rise of the Internet, miss the growth potential inherent in the disruption. Leaders like Reed Hastings, however, are energized by change and frame threats as opportunities.

Second, be decisive. We’ve already described the importance of focusing on a small number of strategic moonshots. Remember too, that the most important word for the strategist contains but two letters: no. People often forget what Steve Jobs did first when he returned as CEO of Apple in 1996. It wasn’t to create new products like the iPod, or start Apple’s innovative retail store. It was to focus by dramatically shrinking Apple’s product line. “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are,” Jobs said. “I’m actually as proud of the things we haven’t done as the things I have done.”

Finally, be scientific. In 1954, the U.S. launched the first nuclear powered submarine – the USS Nautilus. The launch came a mere five years after the start of the nuclear propulsion program. Sixty years later, despite dizzyingly complex technology, the U.S. has not had a single major safety incident. Historians and business scholars credit the discipline that program founder Hyman Rickover brought to all of the scientific uncertainty in the effort. Scientists started with a hypothesis. They designed experiments with clear objectives. They made predictions, even if they had no idea what the answer would be. Then they executed in ways in which they could measure and analyze their predictions. We’d like to suggest by analogy that you can bring the same discipline to the strategic uncertainty that exists today. You never know for sure, but you should always have HOPE – make a hypothesis, design an experiment with clear objectives, make a prediction, and execute in a way that allows you to test and measure that prediction.

We can’t know for sure what the future holds. But we can be certain that the right approach, informed by the right mindsets, guided by the right actions, can help you confidently move forward. After all, as Peter Drucker said, “The best way to predict the future is to create it.”

About Innosight

Innosight is a growth strategy consulting firm focused on helping organizations design and create the future, instead of being disrupted by it. We work with clients across a range of industries to build new growth ventures, develop innovation capabilities, and accelerate organizational change. For more information, visit us at https://www.innosight.com.

 

For More Information

Scott D. Anthony, The First Mile, Harvard Business Review Press, 2014.

Ed Catmull with Amy Wallace, Creativity, Inc., Random House Publishing Group, 2014.

Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution, Harvard Business School Press 2003

Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguerie, “Strategy Under Uncertainty” Harvard Business Review Nov-Dec 1997.

Clark Gilbert, The Disruption Opportunity, MIT Sloan Management Review, Summer, pp. 27-32

Andrew S. Grove, Only the Paranoid Survive, The Crown Publishing Group, 1996

Frans Johansson, The Medici Effect, Harvard Business School Press, 2004

Mark W. Johnson and Roy N. Davis, “A ‘Future Back’ Approach to Creating Long-Term Growth Strategy,” Innosight Executive Briefing, 2015.

Roger Martin, The Opposable Mind, Harvard Business School Press, 2012

Rita Gunther McGrath, The End of Competitive Advantage, Harvard Business Review Press, 2013

Eric Ries, The Lean Startup, Crown Business 2011

Peter Sims, Little Bets, Free Press, 2011