Adam Hartung of Spark Partners led a compelling and thought-provoking discussion at this month’s MITEF meeting on 14 March in Chicago. Adam is a veteran of a bevy of management consultancies and large corporations who has spent the last four years researching a hypothesis about innovation, writing a book (The Phoenix Principle) and consulting. His observations are straightforward, profound and potentially healing for industrial economy companies.
Summary of the Meeting and Discussion
- “Lock-in” is a corporate phenomenon that is fatal for organizations because it prevents new thinking.
New thinking is increasingly important because the market is more volatile than ever. Lock-in happens in a cycle: in its formative stage, the corporation experiences success, and success “hardens” into a success formula; it leaves an imprint on executives, workers and customers, who all identify with the success. Of course, the problem arises when the market moves and nullifies some key assumptions that are embedded in the success formula. There are three types of lock-in:- Behavioral lock-in: group-think, not invented here; slow decision making; rigid ideas about customers and products; sacred cows. Profits from financial manipulation.
- Structural lock-in: many, but one stood out–“biased toward easily quantified, traditional actions and against more speculative ventures.” Tightly integrated processes; relentless focus on process excellence; creative financial accounting.
- Cost lock-in: costs always increase in real terms and are difficult to escape beyond a certain point without cutting innovation.
- Lock-in is very hard to change, and it is the cause of death of many (most?) corporations. Adam cited many well-known statistics about corporations’ short tenures as members of the Fortune 500. Today, bankruptcies are at an all-time high in number and size. The most arresting statistic related to a symptom of lock-in—stalled growth—which he defined as zero/negative growth, either in two subsequent adjacent quarters or in subsequent quarters year over year. Only 7% of stalled companies ever produce 2% or greater growth again, and 70% lose 50% or more of their market value.
- The concept of lock-in is deceptively simple, but it’s a widely applicable. Individuals are locked into their success formulas, as are universities, government and any type of organization. For example, a sacred cow of management education is the “S curve,” which holds that an innovative product experiences nearly vertical success before the slope of the curve diminishes. The rationale of product extensions is to create successive S curves, all feeding off of each other, and this is a myth.
- There are 3 kinds of leaders: stabilizers, explorers and adapters. Each is valuable for various stages of the company’s life cycle.
- Another key concept is “Defend and Extend,” which is invoked when growth starts to falter. The success formula is harshly inflicted on the organization in fierce determination to maintain success. The company tries to defend its market leading position by replicating and extending the formula, not by innovation. Investment in game-changing innovation is pared back because they can’t meet the investment criteria that were established in the company’s heyday.
- Product life cycles are not nearly as durable as they are held to be (this one is close to my heart): Lock-in justifies itself by exaggerating product lifecycles and extensions. Some stats: 86% of new products are extensions, and they produce 40% of profits. 60% of profits come from the 14% of the products that are truly new.
- “The Phoenix Principle” is an approach for rectifying this situation:
- Don’t defend and extend: distinguish between “the challenge” and “the problem.” The former is more externally focused, as it embodies the market’s new demands and a new context in which the company’s product/service is consumed. The latter represents the company success formula’s lack of alignment with the new demands. By focusing on the external, the company aligns itself with customers; the latter is a ticket to demise.
- Attack competitors’ lock-in. Everyone with corporate experience knows that the proverbial “three leaders” in a market often move in lock-step; they often have collective lock-in. But any competitor with the insight, discipline and skill can innovate. He proposes using that to advantage, citing Domino’s, Encarta and Casio as examples.
- Explicitly use disruption as a way to eviscerate lock-in. Groups imbued with lock-in are comprised of individuals that reinforce each other, and it’s critical to interrupt this by exposing the lock-in.
- Finally, use “white space,” which is permission and resources to innovate. To succeed consistently, innovation requires commitment, but it has to be managed by using actionable milestones. Notably, measurement has to be of a different standard, but it has to be real. White space projects must involve new people from the outside. Obviously, you want a strong element of explorers involved.
Additional Insights
“The Phoenix Principle” is valuable because it explains the problem of what I call “industrial economy” thinking in a powerful way and in some detail. Abstracting up a level, it becomes a way to manage the inherent tension between efficiency and innovation. As decision makers, we all face the challenge of when to accept that a “success formula” has outlived its usefulness. Of course, formulas are useful tools, and they’re hard to give up. At a simplistic level, life cycle management of a company, a product or a country revolves around optimizing efficiency and innovation. Too much innovation would not make a company competitive, either, and striving for efficiency using yesterday’s context rapidly becomes a disadvantage. This tension is also directly applicable to natural selection and survival in a literal sense; all competitors in a system are faced with the pressure to adapt.
A related issue is that industrial economy companies have traditionally meant large, complex organizations. In practice, their size has mandated long life cycles because it takes a long time to get all parts of the organization to understand and support the company’s competitive advantage in a coordinated way. In being tightly coupled, their processes do not inherently support discontinuous change very easily.
If information exchange has as much of an impact on life cycles as I hypothesize, the continued increase in information flow may prove that the large organization itself is an outmoded success formula. This is something that will be discovered in the years ahead, as we seek to apply rapidly changing technology capabilities to business process to drive competitiveness. Technology has the potential to change the rules of efficiency.
This is why outsourcing can be such a powerful strategic tool for transformation. It is an idea and approach for collaborating with a partner that excels at a task or process while saving money or creating productivity gains. However, organizations typically don’t approach it as a way to collaborate; their goal is usually efficiency or operational excellence. But those organizations that develop widespread competency in collaboration will have the means to optimize efficiency and innovation as market conditions change. They will be able to tap into competencies outside themselves in a seamless way.
To return to the talk, this discussion gives us a construct with which to ask ourselves, “What is my company’s success formula, and how are we locked in?” I don’t believe that being locked in is a binary proposition: there are always shades of gray. Following the natural selection example, adaptation always involves figuring out what about our experience we can harvest and continue to apply in the present, what we must reject, what we must adapt, and what we must invent. In the context of organizational change, however, Adam’s point is well taken: it’s very difficult to support transformative innovation within the context of lock-in due to the disagreement about when and how we should abandon the success formula. Defend/Extend will always rob resources from innovation because more people (within the company) agree on traditional values. Lock-in has to be identified and faced.
This is a simple concept but it will undoubtedly surprise you if you focus it on organizations you might not think of at first, like sports teams, countries and other institutions—or even yourself!
You captured my talk wonderfully Chris. And yes, Outsourcing can be a critical part of effective organizational transformation. Outsourcing can itself become White Space for finding new solutions. And, when freed from putting management attention and other resources into areas that are outsourced, it is possible to open new White Space projects in critical areas. You’re onto good stuff here – keep it up!