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05 DECEMBER 2016
What were we thinking?

by Rita Gunther Mcgrath: Associate professor at Columbia Business School.

If you are a management theory junkie, the 2016 Peter Drucker Global Conference in Vienna earlier this month was like catnip. A wonderful list of presenters and commentators spoke to the conference theme, “The Entrepreneurial Society,” which seems apt, as many thinkers seemed to assume that the world, as we know it, is in for a fundamental reshaping.

The first full panel of the conference featured keynotes by Clayton Christensen, Phil Kotler, Anil Gupta and Roger Martin. Interestingly, there seemed to be general agreement that the way our capital markets are set up are no longer beneficial to entrepreneurial growth, and may indeed be a drag on the entire American economy. Roger Martin juxtaposed the organisational quest for reliability (as in meeting numbers and targets) with a search for what he calls ‘validity’ - meaning achieving outcomes people actually want, rather than metrics that are poor surrogates. In particular, he criticises the public markets for over-emphasising reliability and under-investing in the innovations which can create new forms of validity. I hadn’t realised that the practice of companies providing financial guidance was only institutionalised in 1996.

This point of view seems to be increasingly in vogue, as observers note that companies are rewarding investors and executives at the expense of employees and the long-term, a point made compellingly by Bill Lazonick. As our recent election seems to suggest, we are overdue for a rethink of these fundamental allocations of resources.

For real economic growth, we need to create new users and new demand, not just shuffle demand around

Clay Christensen also makes the argument, as he has in his latest book, that economic growth does not come from what some might call ‘red ocean’ competition, in which products and services simply substitute for one another. Real economic growth, in his mind, is a function of creating consumption opportunities for entirely new groups of users and buyers. This creates fresh demand, expands the economic pie, and can lead to the creation of new growth jobs.

I think this idea is compelling, with one exception. Many of the new consumption opportunities enabled by digital technologies don’t actually involve purchasing anything, which obviously limits their ability to create solid growth.

Nonetheless, some success stories noted throughout the conferences

A few of my favourite thinkers were part of a panel looking at things in a more optimistic way. The topic was, “Can Large organisations Be Entrepreneurial?” and the panelists (and other speakers) responded with a resounding ‘yes’ which, considering my line of work, is very good news! One of the most impressive presentations was by Rob Van Leen who told an inspiring story of the journey taken by the former Dutch State Mines (or DSM) to becoming a high-growth, innovative company whose tag line, he jokes, is now “Doing Something Meaningful.”

I was struck by how closely the DSM story mirrored the approach taken by Bruce Harreld and his team at IBM in the early 2000’s to revitalise its growth programmes. At DSM, beginning about 10 years ago, Van Leen described the creation of a series of innovation enablers, beginning with an innovation enabling function that he directs. The company also created a venture investment group to make equity investments in smaller firms, a licensing arm to navigate both in-and-out licensing of technologies, an IP group which is moving from an emphasis on patents to an emphasis on branding and finally a core R&D group, called Science and Technology, that maintains the core technological underpinnings for the company. On the actual business development side, the company maintains an incubator to experiment with new ideas. When one of these appears material, it becomes its own “Emerging Business Area”. He described three of these that DSM is developing now: one in biomedical areas, one in bio-based products and one in advanced surface materials. The goal is that these innovation-driven businesses will eventually become part of the core business, even as the company disengages from old areas that are exhausted.

The transformation at DSM reflects almost exactly what I would recommend, and offers a great example of a once-bureaucratic exploitation oriented firm that managed an entrepreneurial transformation.

Hey, CEO – do you really mean it when you say you want innovation?

Curt Carlson, the former CEO of SRI International, during a phase of torrid, innovation-driven growth, brought the conference to a standstill by asking one simple question:

“How many of you have a value-creation playbook, meaning that you’ve trained every employee in innovation practices, and provided them with a manual describing how they can get involved in driving innovation?”

Only about five hands went up in the room. And, things got really quiet.

So, while we are still doing a lot of talking about innovation, it is still, for many companies, no more than "innovation theatre". You can read Curt’s own description of the talk and a summary of his learnings about how to innovate at scale here. He’s also made his slides available for download – check them out, as they are very thought provoking.

Time to change the practice of management?

I had the pleasure of chairing a terrific panel on one of my favourite topics: "How does management need to change as our organisations and their possibilities change?"

The stories of two very different kinds of organisations, to me, illustrate one of the fundamental shifts we see, which is a significant change in our assumptions about what kind of activity needs to be managed and what can be handled by market transacting.

The first concerns a client of mine, a company called Analogic. They invented the CT scanner. They employ very skilled researchers and manufacturers. They make things in the US and offer their employees pretty good jobs. In contrast, we have a London-based company called Deliveroo that operates something like an Uber for food. With all the transactions taking place via a smartphone and an app, its drivers go to a restaurant, pick up an order, only then learning where the food is to be delivered. In a sense, the Deliveroo driver is living in a super-Taylorist world where the algorithm determines all activity, tasks are measured, and workers are on notice that slipping, in terms of customer satisfaction or other metrics, could result in being terminated. In other words, what we are now seeing is that organisations can be run like markets, which is likely to have huge implications for management practice.

I also argued, in this discussion, that we are dealing with two management control systems and it is overwhelming us. The first, is traditional bureaucracy which we have yet to slay. The second, is the horizontal system of networks, communications and instantaneous messaging that occupy so much of our working life.

Another point that came up is that the path to the top of many organisations is no longer a ladder, but a zig zag. Companies are looking for people with diverse ways of thinking who have been exposed to varied environments. This concept is correlated with learning agility, a prized executive capability.

Entrepreneurship: productive, unproductive & destructive

The final panel of the Drucker Forum included myself, Phil Kotler, Roger Martin, Gary Hamel and Clayton Christensen, moderated by Andrew Hill of the Financial Times. Andrew led off with the question ‘Can we build an entrepreneurial society?’ In my response, I suggested that we draw on the thinking of economist William Baumol, who famously proposed that a society can have entrepreneurship which is productive, unproductive, or destructive and that the kind of entrepreneurial behaviour you get as a society depends on the structure of incentives.

Productive entrepreneurship leads to the outcomes that many at the conference want – innovation, productivity gains, economic dynamism and more opportunities. Unproductive entrepreneurship doesn’t really create wealth. Rather, it involves what economists call ‘rent seeking’. Thus, discovering a legal gambit that no one had seen before to save on taxes might be entrepreneurial, in the sense of being creative and generating profit, but it is unproductive in the sense of creating new growth. Destructive entrepreneurial behaviour is even worse – organised crime, large-scale corruption or taking the resources of others by force would be examples. I would suggest that, in many ways, our current structure of payoffs doesn’t incentivize productive entrepreneurial behaviour as much as we would like, instead allowing huge payoffs to essentially unproductive behaviour. For instance, providing returns to investors via stock buybacks and dividends, as opposed to rewarding investments in innovation.

Indeed, in a compelling and powerful analysis, Bill Lazonick creates a connection between the ‘financialisation’ of our economy, income inequality and the disappearance of well paying jobs in the American economy. As he argues:

"Trillions of dollars that could have been spent on innovation and related job creation in the U.S. economy over the past three decades have been used instead to buy back stock for the purpose of manipulating stock prices."

This is entirely consistent with Baumol’s argument – if you disproportionately reward rent-seeking behaviour over innovation, you’re going to get less innovation and more rent-seeking, which was a major theme throughout the Drucker Forum. Lazonick suggests that if we want to restore an equitable distribution of corporate profits to the workers, customers and communities that make those profits possible, that we start with buyback rules. Let’s hope the next administration is paying attention.
Useful resources:

Rita Gunther McGrath
Rita McGrath works extensively with leadership teams in Global 1000 companies who wish to develop their capability to drive growth. Visit our InfoCentre or website.

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