FEATURE ADDRESS

Disruption is accelerating across every industry, and leadership and culture decide which companies stay relevant.

The pace of change is accelerating, raising the bar for established companies to stay relevant. Industries from hospitality to semiconductors are being disrupted by technology, shifting consumer preferences, unexpected competitors, new business models and regulation. The average tenure of a company in the S&P 500 has fallen from 30 years in 1975 to 13 years today, as companies are replaced, acquired or go bankrupt.

Many companies had the technology to adapt yet still failed due to the inability of their leaders to act on it. In the 1960s, Omega funded the research behind the electronic watch but passed on it because of low margins and the risk to its brand. Seiko took it up, and between 1970 and 1985 about 1,000 Swiss watch companies closed and 60,000 jobs were lost.

Leadership and culture explain why Fujifilm thrived while Kodak went bankrupt. In 2000, Kodak and Fujifilm were equal competitors in the film market. Fujifilm’s leaders redeployed its surface chemistry skills into semiconductor materials, medical instruments, cosmetics and regenerative medicine, while Kodak went bankrupt in 2012.

The alignment and culture that make an organisation successful today may become a source of inertia tomorrow.

Culture is not just a statement of values, but a pattern of behaviour better described as a “social control system”. Values displayed on a wall do not tell employees how to behave, but patterns of behaviour reinforced by managers, colleagues and systems for hiring, promotion and rewards are significantly more effective. Leaders must ensure that these systems support the company’s strategy.

Success itself builds the inertia that puts organisations at risk. When customers like a company’s product, the company grows. Growth brings systems and processes to coordinate more people, entrenching their culture, which over time becomes a source of inertia.

Leaders must be Ambidextrous: develop core businesses built for incremental improvement and new businesses built to explore. A mature business depends on incremental improvement, compliance and deep functional expertise, while a new business needs different skills, systems and culture. Companies must thus play two games at the same time: Explore and Exploit.

Leaders should design their organisations to discover the future, with disciplined processes and sustained commitment from the top.

Most large organisations fail at scaling new ideas, not at generating them. Scaling takes resources from a profitable core business, so organisations tend to resist. Companies can counter this by keeping control of new businesses’ budgets as they scale.

A leader’s job is to design an organisation that can discover the future. At Amazon, any employee can propose an idea through a Press Release and Frequently Asked Questions (PRFAQ) document, which is tested with customers before scaling. Amazon Business, now a US$40 billion-a-year business, began with an accounting clerk who noticed small firms buying office supplies.

Exploring and Exploiting together requires five conditions set from the top. These are: 1) an aligned senior team with common goals and incentives, 2) an overarching vision and shared values, 3) a separate explore unit, 4) a disciplined process for resourcing new businesses as they scale, and 5) consistent leadership over 5 to 10 years. Boards should assess chief executives on both current performance and their explore experiments.

Quotes

“If you look at companies like Kodak or Nortel or Nokia, they have the technology. What they didn’t have were leaders that could play two games (exploit & explore) at the same time.”

“Your job as a leader is not to predict. Your job as a leader is to design an organization that can discover the future.”

“If we’re successful as an organization, we develop cultures and then those cultures become a source of inertia. So, the very things that are making us successful in one business are putting us at risk as we try to move into new businesses.”
– Prof Charles A. O’Reilly