From: www.itworld.com

Revolt or Perish -- INTERVIEW: GARY HAMEL

by Alison Bass

April 11, 2001 —

MORE THAN A YEAR AGO, German software giant SAP sat atop the booming worldwide market for enterprise resource planning (ERP) software. Today, startups like Dallas-based i2 Technologies and Ariba in Sunnyvale, Calif., are zooming past SAP to capture the Web-based market for linking customers and suppliers. SAP's mistake? It didn't grab an opportunity that lay just beyond its field of vision.

Although SAP is by no means a corporate graybeard, having soared from anonymity in the 1990s to dominate the ERP market, it fell into the same trap as many large companies. As business "" strategist Gary Hamel writes in his new book, Leading the Revolution (Harvard Business School Publishing, 2000), SAP was so busy riding its existing business model, it forgot to stay alert for the next bend in the road. "In the age of revolution, opportunities come and go at light speed," Hamel says. "Blink and you've missed a billion-dollar bonanza."

Perhaps SAP became hooked on its own rhetoric -- that automating internal operations and wringing every spare dollar out of an existing business model is a worthwhile goal in itself. As stockholders for mainstream companies like Campbell Soups, Dow Chemical or RJR Nabisco are discovering, such streamlining tactics go only so far. The name of the game today is radical innovation, according to Hamel. Without an entirely new approach to creating innovative business concepts and generating new wealth, companies are going to be left in the dust of the e-industry stampede, and so are any CIOs who mistake technological innovation for the real thing.

Hamel, a slightly built 45-year-old with longish-gray hair and tortoiseshell glasses, hardly looks the revolutionary part. He runs his own consultancy, Strategos in Menlo Park, Calif., and is affiliated with the London Business School. When he travels, he stays at the best hotels and dines at the fanciest restaurants. However, when Hamel starts talking about the need for corporate change -- as he recently did with Senior Editor Alison Bass over breakfast at the Four Seasons' Fifty Seven Fifty Seven Restaurant -- he speaks with the fervor of a zealot, a zealot who knows there's no time to waste.

CIO: Your book talks about companies that are riding a dying business model and don't even know it. How can companies recognize that they're about to get kicked in the pants by an upstart competitor before it happens?

HAMEL: One of the important signs is when a companny's earnings are growing faster than its revenue over a significant period of time. These companies are relying on cutting costs, ERP, reengineering and stock manipulation to squeeze greater efficiency in their earnings. We did a study and looked at all the companies from 1993 to 1996 that had a ratio of earnings growth to revenue growth of more than 5 to 1 and found in the subsequent three years that ratio had dropped to .8 to 1.

In other words, earnings were no longer growing faster than revenue, and it wasn't because their revenue growth had suddenly taken off. It was because their earnings growth had collapsed. What you have here is a world of very smart CFOs and CIOs who have continued to wring the last little bit of efficiency out of a dying business model, but at some point that game runs out. You're trying to get blood from a stone.

Isn't it true that investments in new technologies are important to give companies a competitive edge in today's market?

Over the last five or six years, companies have spent billions of dollars on information technology and yet all this investment "" has not shown up in their operating margins. I believe that investment is enhancing efficiency, but it isn't really showing up in competitive advantage. What's happening here is akin to an arms race. Everyone is competing to satisfy customers in shorter and shorter amounts of time. One company says, "Let's spend $50 million on IT so that we can serve our customers in 18 hours." Its competitor says, "I see your $50 million, and I'm going to raise you $10 million so that I can satisfy mine in 16 hours." It's like the Soviet Union and the United States. Each is building bigger missile stockpiles, but the underlying strategic balance does not change.

Today, the only thing that counts about a strategy is how it's different. The question I would put to an IT executive is, "How much of your IT investment is actually creating new-to-the-industry competitive advantage? Not playing a game of catch-up, not part of an arms race, but a new and unique competitive advantage."

It's interesting to note that Dell does not use SAP, as far as I know. The companies that are extracting the most competitive advantage from IT are the ones that are least likely to depend on outside development, vendors, ASPs and so on. Dell is very clear on what part of its IT budget is creating something that is truly unique. Their whole build-to-order system is an example of a new-to-the-industry advantage.

Clearly, IT is central to a lot of radical business models like eBay and Priceline.com, but CIOs need to ask themselves, "Where am I contributing to revenue growth? Do I see my job primarily as propping up existing business models or am I also helping to create the new business models in my organization?" CIOs should start seeing themselves as chief innovation officers.

What exactly do you mean by radical innovation, and where does it come from?

We used to think of innovation as a new product or service. For instance, Gillette came out with a Mach3 razor. Now innovation is seen as an entirely new business model. Charles Schwab is working with a variety of partners to reinvent the way a young company does an IPO, where you literally let certain investors buy into the IPO over the Net, as opposed to reserving the IPO's shares for the big institutional investors from an investment bank. Now that's a new business model.

One way to achieve radical innovation is to change the existing parameters of competitive performance, not by 10 percent or 15 percent but by 100 percent or 500 percent. Imagine Canon or Nikon trying to take another $10 or $15 off the price of a $300 camera. That's incremental innovation. Nonlinear or radical innovation is somebody saying, "Why can't we make a $10 camera?" Violá -- a single-use camera. Instead of asking how to go from $300 to $290, you've created a whole new market. You would never give your Canon or Nikon to your 8-year-old, but you'd certainly give her a disposable camera.

As far as where innovation comes from, most people will tell you it comes from visionaries like Bill Gates or Andy Grove, but that's not satisfactory. To begin with, visionaries don't lead most companies. Secondly, most companies set up by visionaries fail once they run out of vision. CEOs have to learn to give up their monopoly on innovation and find ways to turn that task over to the entire organization.

Right now, most innovation is coming from the upstarts rather than the old farts because the upstarts understand that the only way you can compete against an established company is by radically changing the underlying business concept.

So if you're the CEO of an established company, what can you do to upset this apple cart?

The first thing you can do is make innovation a widely distributed quality within your organization. To do that, you have to teach people new thinking skills. You have to teach them how to be heretics, how to search out and challenge every element of dogma and convention within your industry. Most of us go through life, and 90 percent of what we believe is like the wallpaper at home. We no longer see it or question it. We just accept it.

One of the dogmas in the watch industry was you can have fashion or low price, but you can't have both. You can have a Piaget or a Rolex or you can have a Seiko. Well what did Swatch do? They said, "You can have fashion and low price." All they were doing is taking existing industry beliefs and turning them on their head. Innovation always starts with what most people think is a stupid question: "Why can't you make a watch that is both fashionable and low price?" "When you travel for six hours in a small aluminum cylinder, why should it be a sensory deprivation zone?" as Virgin Atlantic asked. "Why can't you have the massage and seatback video behind every seat?" This is not rocket science.

To get the process started, pull together a group of people who are as diverse as possible. Include some young people and lots of people who are a long way from the head office. Make sure you have plenty of ethnic and gender diversity. When companies sit down to think about future strategy, too often the people who get invited are the old guard, not the vanguard. You want the vanguard.

Have them ask a couple of simple questions: Who are the customers we don't think about? If you have a 10-year-old kid, why can't she have a debit card for Internet usage? If you look at an industry's innovators, they are either dramatically changing their definition of a customer or they're responding to a deep human need.

I think Fidelity Investments and Schwab did this. For years, bankers looked on all of us as savers instead of investors. They assumed we were financially illiterate and only the elite had investment interests. Fidelity and Schwab saw a new kind of customer -- the baby boomers who were willing to take more responsibility for their financial well-being.

What happens if your company culture is averse to change and your CEO is a part of that culture? Should you just change jobs?

If you look through history, you'll find that social change didn't start with the elite. It started with the activists like Nelson Mandela, Martin Luther King Jr. and Susan B. Anthony. The activist shouldn't be a kamikaze pilot or some kind of masoochist though. If you feel like you're beating your head against the wall, you probably don't understand the principles of activism. Corporate activists don't work in isolation. They build coalitions and leverage the energy of people around them. They build a point of view that is credible and compelling. In my book, I go into some detail about how you can change an organization without leaving a lot of your own blood on the floor.

I won't say it's easy, but companies today need activists at the top and bottom of the organization. I work with a lot of CEOs and almost uniformly, they bemoan the fact that it is difficult to change their own organizations. Trying to change the company from the top is extraordinarily difficult. Even CEOs who truly want to affect change will ignore the hierarchy and spend a lot of time with first- and second-level employees. They'll talk about why we need to move in this direction. They'll present the evidence. They'll build an intellectual case. They will inspire people with the noble cause of making a difference in people's lives, and that's all I'm asking activists to do.

That sounds good on paper, but are there really any companies that have managed to inspire their employees and reinvent themselves?

Yes, I call them gray-haired revolutionaries -- companies like America Online, Cisco, Enron, Charles Schwab and Virgin. America Online may be a relative newcomer, but it has made some pretty deep strategic changes in its lifetime. All these companies share several distinguishing qualities. To begin with, they have a very expansive definition of who they are. They're not trapped within a single business model.

Virgin didn't say, "We're an airline, and that's all we are." Now Virgin is selling cell phones and it's into financial services. Enron started out as a gas pipeline company, which is about as mature and unglamorous as you can get. In the space of about 15 years, they went on to become the first major gas company. From there, they became one of the world's leading energy traders. Now they're into trading bandwidth and all kinds of commodities. About every three or four years, they reinvent their core definition.

Another quality of these companies is that they share a sense of having a noble cause. Enron says it wants to drive deregulation in all kinds of markets. They really feel passionate about that. Charles Schwab was passionate about helping people manage their financial lives. All of these companies have huge ambitions, not just to make a lot of money. Unless you have that kind of noble cause, I think it's difficult to summon up the courage to change when you need to change.

One last difference, which is the most important, is that gray-haired revolutionaries have learned to bring the ethos of Silicon Valley inside. Silicon Valley is an open market for ideas, experimental capital and talent. It's truly a market where the best ideas attract cash and talent and the worst ideas die. Most companies aren't markets, they're hierarchies. They have to learn to remake themselves into places where radical innovation is happening.

It might help to keep in mind that somewhere out there is a bullet with your company's name on it. You can't dodge the bullet. You're going to have to shoot first. You're going to have to out-innovate the innovators.

PHOTOGRAPHY BY KENT HANSON

CIO