Digital Darwinism

by Tom Goodwin

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  07

  Today’s business dynamics

  The secret of change is to focus all of your energy, not on fighting the old, but on building the new.

  MILLMAN, 1980

  Few people expect to get a glimpse of the future in Slough. But the drab corridors of the town’s Crowne Plaza Hotel contrasted sharply with the profound insight into the future I received there.

  It was 2006, and I was working with the Nokia Nseries marketing team. We were holding focus groups with prototype touchscreen phones, the like of which nobody had ever seen before. This was way before the iPhone. It was fair to say that not everyone saw the future that day. People almost without exception hated the new phones. They worried that the screens would smash even though we assured them that they would not. They hated the fact that the battery life was less than two days. They worried about strange things such as fingerprints making the screen greasy. Above all else, people couldn’t really see the point. For the outrageous trade-offs that had to be made – the large screen necessary to view photos that people were yet to share and to access apps that didn’t yet exist – the main takeaway was that it did more than they needed to. I remember more than anything else the proclamation that, ‘I like the internet, but I’ve already got it at home’.

  Even those companies who see the future more than most can find it very hard to change.

  In this chapter I want to outline how to build on the foundation of change I introduced in Chapter 6. Regardless of whether you are changing all or very little, how can we bring about the changes to any business that will help drive enthusiasm for new technology, passion for change, and a positive feeling about growth?

  These are exciting times. We forget that. It seems today that it’s easier to set up a large media company like Vice, Quartz or the Outline from nothing than it is to rewire a legacy business to become one. It seems as if it’s easier to set up a brand like Glossier or e.l.f. from scratch than to get Estée Lauder or Beiersdorf to make it. This should feel like good news for everyone, but it rarely does.

  In this chapter, we will explore why companies have so far failed to innovate, in order that we can understand their reasons and offer suggestions for how they can innovate in future. How can they combine the best of both legacy knowledge, which includes industry recognition and expertise, with the need to embrace what’s now possible?

  So why don’t big companies innovate?

  Blue Bottle Coffee is one of the many success stories of 2017, recently valued at $700 million after meteoric growth for 15 years (Atkins and Bradshaw, 2017). It’s the sort of company that sets the tone for the start-up scene and creates the role model every start-up owner wants to become. If you wanted to start Blue Bottle Coffee today, it would require a lot of effort and not insignificant resources.

  You’d want a team that understood branding and could develop a great image for the coffee. You’d ideally have access to the best ad agencies in the world and the best graphic designers. Ideally, you’d have some sort of food engineers to perfect the product, to hone over months the perfect flavour profile and the right way to store and mix products. You’d want some analytics and insights staff to see trends ahead. You’d want packaging experts owning relationships with packing companies, alongside procurement and sourcing people holding the skills to find the best products on earth and the power to negotiate down price. You might also want a real estate expert, and a good legal team. Now armed with all this expertise, you would need cash behind you. Perhaps you may need $20 million to start with enough potential. It’s a pretty pure combination of branding, building and design.

  You might imagine that the sort of company that would be well placed to do this may be Procter & Gamble with their marketing prowess and deep pockets, or maybe Mondalez with their food experience and huge global footprint, or perhaps Nestlé, whose R&D budget is estimated at around $1.7 billion per year (YCharts, 2017). It’s pretty clear that all these companies were ideally placed to create Blue Bottle, but none of them did.

  Blue Bottle was started by a self-proclaimed ‘coffee lunatic’ called James Freeman, who in 2002 decided to start selling his roasted coffee beans at a farmers’ market in Oakland, California. He used the buy-out money he received from being an early employee at a pre-Pandora start-up. Until 2008 (when he took on a minority investor), his business had survived on very little money, with Freeman putting in just $15,000 and taking on some credit card debt to launch his company.

  In total, by early 2015 the company had taken about $45 million in funding (Sacks, 2014). In 2017, Nestlé spent $500 million to acquire 68 per cent of Blue Bottle – a brand and company it could have easily built itself (Atkins and Bradshaw, 2017).

  Buying innovation is the fashion

  This strange behaviour is everywhere right now. When Unilever bought Dollar Shave Club for $1 billion (Primack, 2016), it didn’t get any patents, an R&D team or a production facility. There were no valuable commercial deals, or amazing staff to acquihire (buying a company in order to recruit the staff). It was just 190 employees who made a thin veneer of a company that resold Dorco generic razor blades, via a logistics company in Kentucky (both of whom made money) while Dollar Shave Club lost money on every order and every customer.

  Again, regardless of whether the deal was good or not, the fact remains: why could they have not done this themselves?

  Accounting and outsourcing risk

  I’ve asked a few of these companies and companies like them in similar circumstances and I learned a lot. I was always there f
or ‘innovation days’, days to be out of the office, forget about the real job, and to dream big. Sitting in the room, it always felt to me that at best it was like teaching art in school, where people would look forward to it, and love it, but mainly because it didn’t matter. At worst it would feel like a sort of adult crèche, a way to keep people busy and take some nice photos. We’d have post-it notes and coloured sofas, boards with ‘dream big’ and motivational quotes. Probably a story from a founder and a fashion blogger shipped in to talk about the spirit of innovation and someone else to talk about passion. It was always very sanitized. Being me, I would frequently get quite cross and ask these people the annoying questions, like ‘why didn’t you create these companies?’.

  For one thing, the accounting procedures killed innovation. Most FMCG companies are factories with marketing departments stuck on the side. Procurement plays a major role, and much like staples, sugar, or ammonium chloride, everything that costs money is measured, the cost of it driven down and real needs established. Now it’s bad enough buying ideas or advertising in a procurement-driven culture, but when buying innovation it is crippling.

  By definition innovation is something new. There is no return on investment (ROI). There is no meaningful ROI possible for anything bold and new. What was the Wright Brothers’ ROI for flying? In 1985, what was the ROI for inventing Red Bull? What customer research showed people wanted bagless vacuum cleaners? If you can’t show an ROI, about the only other thing you can do to get investment signed off is to show case studies of what your competitors have done, and use their actions to justify yours. It’s by this reckoning that Tropicana can make smoothies but only after Innocent owned the market, or large European car companies can make electric cars, but only very late in the day.

  Big companies are about continuous improvement, about making everything slightly better, slightly cheaper, each and every year. They wait for start-ups to get big, pull out a billion dollars or so, buy the company, and get to showcase to the world that they are ambitious, financially strong, that they get the change. The cost of this unit goes straight to the balance sheet as an asset for the price paid, the share price may go up by more than this, life is good. Why would anyone have it any other way? How about because it’s a very inefficient way to change and there is a long predictable history of large companies failing to work well with what they’ve bought. Something needs to change.

  Establishing a leadership for change

  The reality is that many CEOs and leaders don’t actually want to change. They have it too good. John Winsor, the founder of Victor and Spoils and long-time innovation leader, believes a lack of real change ‘comes down to misaligned incentives’ in what he labels the ‘Hamptons Effect’ (Winsor, 2017). It is this incorrect alignment of the best interests of the company and the best interests of the leadership that is the big force stopping change. Looked at objectively, many people could actually be regarded as smart for not wanting change.

  Typical CEOs are not trying to make their career, they’re trying to round it off. He (because invariably it is a he) isn’t trying to make a name, he’s not wanting to be the one that brought about change. For the majority of CEOs the allure of a steady retirement, playing golf and a step change after a hard career is naturally very strong.

  Short-termism is killing ambition

  Short-term thinking is everywhere and it makes radical change and investing in the future very hard. In 1940 the average period a share was held was seven years and for around 35 years this changed little. By the 1987 crash, stocks were held for less than two years, by 2007 this had fallen to seven months, and today it’s four months. And that’s if you ignore high-frequency trading, where the typical hold plummets to 11 seconds (Haldane, 2010).

  Everything in the business world seems to be accelerating. The average tenure of a CEO is now 6.6 years, compared to 8.1 years a decade ago (Weinmann and Groth, 2011). Today leadership roles are primarily facing the financial markets. Every public company is led by CEOs, leadership teams, and departmental managers, whose entire financial future is held hostage by the share price. It’s this condition that means all decisions must be made with regard to credit brokers, stock market analysts, stock pickers, journalists.

  One would assume companies would pray at the altar that is customer service, or better products, or designing great experiences, but in fact most corporate entities entirely face Wall Street in the USA, the City in London and their equivalents around the world.

  It means news must be managed, risks must be avoided, balance sheets must be guarded. Numbers must be reported quarterly, profit warnings given where appropriate. Companies with stature and history are forced to show continuing profits, maintain the vital price-to-earnings ratio, keep the EBITDA (earnings before interest, taxes, depreciation and amortization) and maintain dividend payments to investors to keep share prices high.

  We need to find a way to change this culture. The wavelength for re-engineering many companies around the level of change they reasonably need is far greater than typical tenures in roles or what the stock market will forgive. The current financial environment only rewards those who cut their way to profitability, not those who invest for growth in the future. We have an especially strange trend where companies can celebrate revenue growth in fields that are unprofitable. ‘Look at how many new customers we have online’ is a frequent boast, without the acknowledgement that these customers lose us money.

  If companies are ever to succeed long term, they need to establish a way to reward those who turned ships around, not who jumped while things looked fine.

  Success takes time

  It’s rather counter-intuitive. We feel that tech companies espouse agility and speed, but the most successful companies today are companies that have operated with the long term in mind. Amazon now spends over $16 billion in R&D, and Jeff Bezos makes a point of not wanting to turn a profit for a very long term and investing all potential income into growth for the future (Molla, 2017). The tempo of most public companies is set by the three-month beat of quarterly earnings, but the strongest and most fashionable companies have become masters of setting their own tempo.

  Strong leaders give the teams and company confidence to manage timelines the best way: sometimes it’s the need to be fast and decisive, and other times it’s about waiting for the right moment. Often innovation isn’t about jumping to things first, it’s not about first-mover advantage but knowing when the time is right.

  Charismatic leadership

  When we look to the companies we most often admire, that have either become successful recently or become textbook examples of how to lead, we notice the rise of the enigmatic and strong-minded leader.

  With the right leadership in place, the right mission in mind, with a role and goal in sight, we can then create the key elements needed for a company’s prosperous future. What ends up with tactics, products, service and initiatives starts out with leadership that creates a culture for change. However, culture is exactly the thing that can hold innovation back. Culture means ideas are killed early or never shared or most likely are never even born. A lack of innovation in the culture of an organization will reinforce itself: bad talent nurtures talent badly and attracts the same. I’ll explore this later and what can be done about it, but first let’s focus on how to change culture. It comes from the top.

  Strong HR and talent departments can help ensure people work around objectives not around ‘busyness’. Too often we celebrate how hard we work, not what we accomplish. Corporate culture today is typically about being in the meeting, not establishing if the meeting really needed to happen. Trust is a vital part of management by objective. It is also vital to ensure that people feel free, empowered, important, relied upon. This combination allows employees to work from wherever they would like to best get their job done, to make sensible decisions, to undertake risky actions but with good intentions and good information and to do so by asking forgiveness if things go wrong, not perm
ission before they act. A strong HR function can empower rogue behaviour, the sort of behaviour most likely to drive growth in new ways.

  When wonderful people can work anywhere, companies need to strive to make the most of people. Reward them in strange ways, make happiness the number one goal, allow them to be relaxed and feel valued. They are to some extent all you have.

  An intolerance of bureaucracy

  Small companies feel different to big ones. I have worked at both. In large companies, if I am travelling for work I will be forced to use some admin staff to book a hotel with a corporate travel provider. Perhaps eight e-mails will be sent to me with various approval chains and updates, my boss will be asked to agree, a business reason is noted. Some systems will talk to others, and my assistant will orchestrate the whole thing. It will take perhaps 10 minutes of my time, 30 minutes of my assistant’s, and likely an hour of other people’s in back offices. All this to book a hotel stay for $200 that on the Hotel Tonight app I could book in around three seconds and for $100 cheaper. Why is it I can call an hour-long meeting with 20 people, costing perhaps $2,500 of time and nobody cares, but I need to ensure I use approved agents to get a hotel room?

  Every company, large and small, needs to reject bureaucracy and busy work. We worry a lot about seniority and protocol, but often it is an excuse. I love a memo sent out by Elon Musk, in which he says: ‘Anyone at Tesla can and should e-mail/talk to anyone else according to what they think is the fastest way to solve a problem for the benefit of the whole company. You can talk to your manager’s manager without his permission, you can talk directly to a VP in another department, you can talk to me.’ He goes on to say, while realizing the challenge and opportunity ahead and what they have against them, ‘We obviously cannot compete with the big car companies in size, so we must do so with intelligence and agility’ (Bariso, 2017).