Is there more to the story of the large corporate incumbent than a bureaucratic monolith crushing more deserving startups? Gary Pisano thinks so. He argues that an innovative culture can exist regardless of the size of an organisation. In this book, he describes the innovation DNA, how they exist in pairs that not everyone likes. He also talks about how existing technologies can survive and even flourish for a surprisingly long time in the face of new exciting but unproven technologies.
In the Do You Know section, you learn about product innovation strategies that you can use at your next business case study. And my author question for Gary Pisano is about how creative construction in a large organisation applies to decisions about anti-trust.
Is there more to the story of the large corporate incumbent than a bureaucratic monolith crushing more deserving startups? Gary Pisano thinks so. He argues that an innovative culture can exist regardless of the size of an organisation. In this book, he describes the innovation DNA, how they exist in pairs that not everyone likes. He also talks about how existing technologies can survive and even flourish for a surprisingly long time in the face of new exciting but unproven technologies.
In the Do You Know section, you learn about product innovation strategies that you can use at your next business case study. And my author question for Gary Pisano is about how creative construction in a large organisation applies to decisions about anti-trust.
You are listening to the Book Judge, a podcast about books that you should read if you are interested in business. I am your host, Conrad Chua. With more than 10 years of experience in business education, I have seen the amount of business theories and information explode in that time. So I am going to help you by introducing books that anyone in business or business school should read. We will cover the usual business school disciplines like strategy, marketing, innovation but also some professional development books and even fiction. Think of this as your curated reading list that will give you a better grip on how to approach the complex issues that businesses face.
Today’s episode is the book Creative Construction : The DNA for Sustained Innovation by Gary Pisano. The title is a twist on Schumpeter’s idea of Creative Destruction. There is this idea that large companies are these dinosaurs that are weighed down by bureaucracy that stifles innovation.
Gary wants us to scrutinise this concept and not blindly accept it. He points out that there are lots of large companies that continue to innovate. For example in 1982, scientists developed a genetically modified plant cell that laid the foundations for genetically modified food. Set aside your views on GMO but think about the huge impact that development has had on agriculture in the US, the largest market in the world. Pisano points out this did not come from a startup, but from Monsanto who had been around as a company for more than 80 years. It was a company that wasn’t even in the seed business at the time but had spotted, and developed the innovation that would transform the company and the industry.
There is also the survivor bias when we look at startups. We glamorize the startups that come from nowhere to topple the incumbent with a great idea executed brilliantly but we don’t consider the tens of thousands of startups that don’t make it.
Another common bias happens in the way that people get excited about new technologies. I can’t remember where I heard this from but there is this popular saying that we tend to under-estimate the impact of truly disruptive technologies but be overly optimistic about the time it takes to adopt this. Pisano fleshes this out by considering technological paradigms rather than discrete technologies. For example, everyone is excited about the prospect of electric vehicles replacing the internal combustion engine. But the internal combustion engine is not just one physical thing. There is a huge amount of knowledge, experience, design behind it. Auto-manufacturers, governments and investors are throwing huge amounts of money to develop electric vehicles and batteries but what gets lost in all this is the continued improvements to the internal combustion engine. That technology is not completely hopeless and still has a lot of legs to go. Pisano calls this the last gasp. In some cases, this last gasp can go on for a surprisingly long time. And so investors and corporate leaders need to weigh the potential rate of progress in a new unproven technology, vs the potential rate of improvement in the existing technology. They should not dismiss the incumbent outright.
Pisano is careful not to come across as a blind cheerleader for large is better. He knows that many large companies get blindsided by technological or societal changes and Don’t react fast enough. The corporate graveyard is overflowing with the likes of Kodak, Xerox and Nokia, that only come to life in business case studies. But Pisano argues that there is a more complex picture at play here. For example, people think Kodak was too complacent about the impact of digital imaging on its core film business. But what actually happened was that Kodak did invest in digital imaging. What had really changed was that the profit potential in digital imaging had shifted. Now anyone with engineering chops could build a camera. The entry barriers collapsed and with it, the profit potential for a company such as Kodak.
For me the big reveal of this book comes at the end, in the chapter on culture. Pisano had asked different management audiences to identify the characteristics of an innovative culture. There was nothing terribly surprising in their responses, which Pisano categories as Number 1, A Tolerance of Failure. Number 2, A Willingness to Experiment, Number 3, Psychological Safety, Number 4, Collaboration. And Number 5, Flatness.
Nothing surprising here. Almost everyone Pisano spoke to agreed these were characteristics of a great place that they would like to work for. But as we all know, implementing such cultural changes is very difficult. And Pisano looked at it from a different angle. If everyone felt these were characteristics of a great place that they would like to work for, then why is there resistance to cultural change in this direction? One could dismiss such resistance as the entrenched positions of people in the organization who fear their power being eroded. But Pisano shows that there is something deeper at play. That if an organization truly wanted to be innovative, then those 5 nice cultural traits had to be paired with 5 not so palatable traits.
In Pisano’s view, true innovative DNA had cultural pairs.
So Number 1 should be A Tolerance of Failure But No Tolerance for Incompetence. Meaning you need to set extremely high standards in order to tolerate failure.
Number 2 should be Willingness to Experiment but be Highly Disciplined. Meaning you have to be brutal about the cost and learning points from your experiments and not hesitate to cut a project based on the data.
Number 3 should be Psychologically Safe but Brutally Candid. Meaning psychological safety works both ways. You have to be ready to receive negative feedback just as much as you give it to others. Only in this environment can the best ideas be scrutinized and refined.
Number 4 should be collaborative but Individually Accountable. Meaning that there has to be an individual, not a team or business unit, who is accountable for the results. Collaboration is not the same as consensus which can slow down the innovative process and in many cases, choose the wrong option. Unintuitively, this accountability creates a collaborative atmosphere because that individual would seek inputs from others to get the best result.
Number 5 should be Flatness But with Strong Leadership. This is the one area that I felt Pisano skimmed over because he should have fleshed out what is strong leadership. He points to Jeff Bezos, Larry Page, Sergey Brin as examples of strong leaders who led flat organisations but I felt he really needed to go deeper. Instead he just says that strong leaders can occur everywhere in the organization. and these are people who set priorities, clarify objectives and ensure that there are enough resources to pull it off.
This is the part of the podcast where I place the spotlight on one part of the book that you can use immediately in your business, or in an interview, or just to impress your business school friends. I call this the Did You Know section.
If you are in a case interview or business case competition, there is a good chance you are going to be confronted with a strategy case regarding which product lines to invest in. While implementing the innovation DNA is the most pivotal thing a leader can do for an organization, unfortunately these business case situations don’t want to hear that sort of talk. They want clear, concrete recommendations that can take place over several months.
This book provides a lot of good pointers that you can use in a business case. Or if you are reviewing whether your organization is on the right innovation track. Here I pick out some of the more important ones.
First, is to clarify the tradeoffs the organization is willing to make between the short-term investments in existing markets, vs longer-term exploration of new opportunities. Watch out for the organisational tendency to just focus on incremental improvements to existing markets, or milking their cash cow. Think how Microsoft relied on Windows and Office for too long before pivoting to the cloud. On the other hand, organisations that introduce a transformational innovation but can’t scale beyond that first generation market will also get swamped by companies that can.
So if you are sitting in a case interview, poring through the data, here are some useful metrics to think about.
Number 1 :- How fast is the core market capable of growing? Pisano looks at the difference between Google and the tire company Goodyear. Google is in a market that has huge upside potential so it makes sense to do routine innovation to exploit its core advertising business. Goodyear is in a market that won’t grow that much. So it has to explore radical innovation, sometimes in complementary areas.
Number 2 :- What are unmet customer needs? In the days when there was huge customer demand for better micro-processor performance, Intel did very well from making routine spec improvements. On the other hand, Gillette has reached the point where customers don’t care if they cram ever more blades into their shaver. I am one of those customers who just stopped when there were three blades in a Gillette shaver. Instead customers want an easier purchasing experience for razors and that’s where the likes of Dollar Shave Club or Harrys have stepped in. This is something to watch out for. Are customers less willing now to pay for incremental improvements?
Number 3 : - How much potential is there in the existing technological paradigms. I talked about this earlier with the Internal combustion engine. Suffice to say, that any prediction about the future will carry huge uncertainty so make sure you have a good risk management process in place.
Number 4 : How to create barriers to imitation? Pisano offers several suggestions. You could build complementary technologies that are hard to imitate. Think Tesla building huge battery factories. Or You could focus on business model innovation. That’s how Dell focused on its logistics and supply chain to sell essentially the same PCs as everyone else but much faster and with greater customisation. Lastly, you could focus on rapid, routine innovation. That’s how Apple cranks out a new iPhone every year that’s always a bit better, always “the best iPhone ever made”.
You can use these 4 rubrics at the next innovation or product market case study. Remember it is all about striking that balance. Don’t dismiss the existing technologies and market strengths.
One thing I have found with some MBAs is that they walk away from one or two years of studying cases and they think everything is so clear and obvious. Of course this is with the power of hindsight.
Pisano pushes back on this and says things are not so simple. The biggest difficulty is that it is very difficult to predict the future, even with lots of information. This is especially the case with technology and business model predictions.
For one, technologies don’t exist in isolation. They work in a system and depend on other factors or technologies. Again looking at the automotive industry. If you are taking a bet on an electric vehicle manufacturer, you have to think about advances in battery technology. You have to take a view on how quickly the charging network is going to develop. How will government subsidies play out, will oil prices continue to stay so low. Pisano also has the example of Netflix. Initially it started shipping DVDs to customers. But when high speed broadband became more common, only then could it shift to the streaming on demand model we see today.
There is also what Pisano calls “endogenous customer preferences”. This is the idea that it is very difficult to predict if customers will want a new technology if they have not seen it before. No one knew they wanted or had to have an iPhone until Steve Jobs walked on stage to introduce the first one. No focus groups is going to give you that sort of predictive insights.
And finally of course, there is the issue of competing technologies with their own rate of development.
All this adds to the complexity of trying to predict technology and business models. It also means that business leaders have to be even more careful about the innovation portfolio that they are pursuing and the risks they are taking on.
For every book I introduce, I have this segment called the author question. One question that I could ask the author. And my question to Gary Pisano is about how his views apply to anti-trust. He is not a fan of M&A but would the idea of creative construction mean anti-trust regulators should have a more lenient view on large companies acquiring smaller companies to for their new technologies.
That’s all for this episode of the Book Judge. You can subscribe to this podcast through Apple Podcasts or Spotify or wherever you get your podcasts. While you are there, leave a rating. It helps others discover this show.
If you have comments, you can tweet me @ConradChua16, or DM me on Instagram. I am chuakh there.
Till next time this is your Book Judge, Conrad Chua