And what to do about it
Almost all CEOs face the challenge of maintaining relevancy in the markets they serve. More specifically, what keeps many CEO’s awake at night is the realization that something is materially changing in their company, in their markets, or within what was once a marquee product line. Yet, the rank and file just can’t see it. And if they do see it, they aren’t responding fast enough. Maybe our CEO can’t fully understand it. But their instincts tell them that it’s more than a seasonal blip; it’s something systemic that could rock the company off its foundation. In many instances, the problem boils down to the company not innovating fast enough. The world is seemingly passing it by. Relevancy is lost.
Often, a firm’s business model, that was created years ago, that once aligned departments so efficiently, continues to be focused on products or services that customers are becoming less enamored with. Yet the language in meetings is so focused on pushing product X or service Y and a downward dip in the sales projections has to mean that sales and marketing aren’t doing their jobs. While this might be true, the larger problem is, or will be, that something is happening in the market that is changing the game and the company is slow or reluctant to see it. And by the time it is seen, it’s often too late. Why is this?
Let’s travel back in time. When companies are formed, someone had a brilliant idea. They could see a gap based upon what existed at a point of time. In B2B markets, there was a problem to be solved and the entrepreneurial founder connected the dots that existed in that reality and created something that solved that problem like no other. Whether by happenstance or creative experimentation a business model was discovered that connected the value proposition with customers and routes to market and it worked. Fast forward and the model works and the company is growing and becomes profitable. Professionals are hired to execute the model and policies and procedures are established to assure that it is executed as efficiently as possible. The great news in the short term is that employees earn their bonuses and the company is listed as one of the best places to work by local publications. Everything looks great. But there is a metamorphosis at work.
In most markets, things don’t stay static. The dots that you relied upon that defined your differentiated value proposition, your ideal customer, and your routes to market may change. Making it even more complicated, competitors, assuming you’re not a monopoly, have been attracted to the market and using their insight, creativity, and their own new clay to work with have added new dots, perhaps some violently colliding with your own. The market responds and if the cost of switching isn’t enormous, customers move on and buy from your competitor. Loyalty counts but it can only go so far. It may not even to be a feature-for-feature comparable product to yours but instead, introduces a whole new way of doing something that also addresses the problem you were out to solve. As a simple example, think of how pagers were used by sales people twenty plus years ago. Enter the cell phone followed by the smart phone with functions becoming increasingly integrated in a digital world. Or, just think about open source software and how quickly that has driven integrated functions (E.g. Machine Learning) and broadened accelerated innovation. Companies that fail to innovate, that is, challenge the ways that the dots are connected, or even introduce new dots (E.g. new technology) may find themselves in trouble, hence our CEO laying in bed at 2am staring at the ceiling thinking, “what is happening”!?! So given this, why can’t companies simply spend more time innovating? The answer is that it’s simply not that easy.
The reason why companies have such a difficult time innovating is because they’ve built a gigantic flywheel that has so much inertia around it, centered on a business model that has served them well. The organization by this stage has difficulty with ambiguity; time is precious after all and one needs to execute against the game clock. The quarterly cadence is well defined. The CFO is conditioned to post growth, and understands the levers to pull and buttons to push that have historically delivered results. The “business model” is broken into % of revenue by function and everything is synced. Keeping engineering spending at 14% of revenue and marketing and sales at 18% with the belief that everything should work, trickling down to operating profit of 15%. This again, was not the model when the company was incorporated and chances are, going forward, won’t be the model long-term. Aspects of the business model, other than the financial model are easily forgotten when the firm experiences some success. For example, does the all important core value proposition still resonate with today’s and tomorrow’s customers?
Market forces and technology shifts can introduce significant changes but it’s the innovative companies that create havoc with these changes on existing paradigms and views of reality. How did Amazon transform itself from being an online book reseller to supplying Cloud infrastructure and transforming the cost of computing? The answer is that Amazon reconnected the dots and even created new ones. It has been in a state of constant innovation while leveraging a business model that can scale in different directions while taking advantage of many of its core competencies. Building Amazon Web Services I would argue was not at all orthogonal to building out its huge merchandising business. The latter took advantage of the gains made in computing, including the cost model. Did Amazon anticipate when it was founded the advent of Cloud computing and what it could mean? I doubt it, but it sure capitalized on it.
Given these challenges, how do companies ensure that they aren’t the victims of their own early success? How do CEOs enable their companies to innovate? Here are some simple steps to consider:
- The CEO needs to ensure that their vision for the company resonates and motivates people over time. This means that the CEO needs to constantly be asking is this vision still realistic and inspiring in today’s environment? The CEO needs to be a student of the industry, with a deep appreciation for the customers they serve and the problems they solve. I’ve seen too many instances where the CEO, with the best of intentions, lost touch with their customers. He stopped visiting customers and relied way too heavily on reports back from the field. They need to ensure that the vision still resonates with their customers and listen carefully for shifts and holes in the armor.
I’ve worked closely with CEOs that dismissed the notion of visiting with customers because they totally underestimated how valuable these visits are to customers. I’d hear words like, “they really don’t want to hear what I have to say and they’re being well served by our sales team”. But that fact is that customers generally appreciate the visits, especially when the CEO comes with open ears- to hear both praise and take in sincere criticism. They are the great litmus tests for the firm’s vision, strategy and execution.
I remember taking my CEO to Ebay years ago to visit an IT group. We were expecting two to three people at the meeting. There ended up being standing room only in the large conference room where we met and there was sincere interest in what he had to say. His vision was shared and still carried an emotional appeal with people. It had the reciprocal effect of energizing both of us. The takeaways were impactful and when the CEO returned to headquarters and shared his observations with the executive team you could hear a pin drop. The CEO is in a position to gain significant feedback from customers as to how the company is doing on the innovation front. Customers are not shy, when prompted, to share their perspective on your positioning in their market.
- As part of the strategic planning process, it’s imperative to be very honest and realistic about the state of the market and competitors. Don’t be flippant or arrogant about new market entrants. Take a very careful and thoughtful survey of the landscape gaining as much as input on competitors and disruptions to historical workflows as you can. In the customer world, this often translates into users finding new ways to tackle today’s bottlenecks. What are these new bottlenecks or problems? Are new competitors around the corner that could easily do what we did plus extend their reach and address the new bottlenecks? Given these moves, what should our next steps be, how do we resource this, how do we excite and motivate the troops and hold them accountable for execution- backed by intrinsic and extrinsic reward systems.
- Building an innovation subculture that is both comfortable with ambiguity and rewarded for experimentation when discovering new dots. While it’s impossible to change an entire culture back to start up mode, the CEO should think carefully about appointing a team of people, perhaps including themself, the freedom to experiment and think outside the box unencumbered by corporate structure (process, procedures, or strict time tables) and immediate profit generation. To think about customer problems, new technologies and ways of doing things. With data to back it up, present strategic possibilities with vetted ideas and make the calls about areas for new investment that will pay back in several years. And this may entail the above board realization that such moves will result in the eventual cannibalization of existing products or services. My take on this is that if a CEO isn’t prepared to make these hard choices, others in the market will eventually make them for them. Maintain some sense of solace knowing that dealing with ambiguity is part of the job and that many great CEOs have navigated through the maze. I’m reminded of the lines from Dr. Seuss’ book, The Places You’ll Go:
“You will come to a place where the streets are not marked. Some windows are lighted. But mostly they are darked. A place you could sprain both your elbow and chin! Do you dare stay out? Do you dare go in? How much can you lose? How much can you win? And IF you go in, should you turn left or right… or right-and-three-quarters? Or, maybe not quite? Or go around back and sneak in from behind? Simple it's not, I'm afraid you will find, for a mind-maker-upper to make up his mind.”
- It often helps to bring in another set of eyes to help with the process. Some companies think of these as strategic planning cycle facilitators. I think of it as being so much more. The executive team is often faced with a number of current challenges and the workday seldom presents enough time to look at things with a fresh new perspective. And while such a person may have a pure consulting background, bringing in a senior executive that has been an operator and faced similar challenges, in balancing the innovation conundrum, can accelerate learning and hence, positive change. And while CEOs can and should benefit from joining a CEO peer group where he or she can safely discuss company and strategic challenges, having an on-board executive at the table to assist the CEO in thoughtfully articulating strategy to back his vision, supported by the generation meaningful execution plans, can dramatically increase the odds for success.
In summary, CEOs need to feel comfortable with the fact that the formulation of strategy isn’t always a straight line. There is often ambiguity outside the four walls of the company that the CEO and their team must navigate through to maintain relevancy. Over time, especially in our accelerated world, it’s a challenging task to maintain relevancy through mindful and constant innovation. Innovation often means connecting dots in new ways, taking the CEO and their team outside of their comfort zone, to a state once enjoyed and celebrated by the company’s founders. The conundrum of balancing efficiency in executing today’s operating plans with innovating for tomorrow is real and challenging. Fortunately, it doesn’t need to be an either A or B scenario when the right forethought is applied.