Seeing Around Corners

by Rita McGrath

Bringing a growth mindset, rather than a fixed one, to the problem of detecting and responding to inflection points is crucial.

  Empowering individuals to take action broadens the amount of experimentation an organization can undertake, increasing its odds of seeing the early warnings of an inflection point in a timely way.

  If you want experimentation, people who try things that don’t work out need to know that they will be supported.

  Building leading indicators into your organization’s incentives ensures that people will pay attention to them and increases the likelihood that they will be acted upon.

  7

  * * *

  How Innovation Proficiency Defangs the Organizational Antibodies

  Entrepreneurship is not “natural”; it is not “creative.” It is work . . . Entrepreneurship and innovation can be achieved by any business . . . They can be learned, but it requires effort. Entrepreneurial businesses treat entrepreneurship as a duty. They are disciplined about it . . . they work at it . . . they practice it.

  —Peter Drucker

  Gisbert Rühl doesn’t look like a revolutionary. He looks more like the combination of the engineering and accounting type that his background would suggest. And yet, his aspirations are nothing short of revolutionary—disrupting the way business is traditionally done in the venerable global steel trade.

  But first, a word about the somewhat arcane way in which steel finds its way from producer to steel customer to, eventually, you. I knew nothing about this process when I was invited to give a keynote address at the Metals Service Center Institute in 2014. (Who knew this was a thing?) There I learned that there is a vast network of what are called “metals service centers.” They exist as intermediaries between the big steel suppliers and smaller consumers. The big suppliers think about selling tons of the stuff. The smaller buyers don’t want or need that much, nor do they want to hold inventory to make the actual items they use.

  Enter the metals service center players. They buy in bulk from the large manufacturers, alter the steel to better suit customers’ needs, and then resell it to their accounts. They also carry inventory—a lot of inventory—to make sure they can meet customers’ expectation of virtually just-in-time delivery. Klöckner, which is based in Germany, is one of the larger players in the metals service center business.

  Taking the Reins in the Teeth of the Great Recession

  Gisbert Rühl became chairman of the management board and CEO of Klöckner in 2009. It was a terrible time for the world steel industry. Demand was down, and capacity had not shrunk enough to keep prices from plummeting. Chinese manufacturers were putting more product into the system, creating even more overcapacity. The Organisation for Economic Co-operation and Development published worried tomes on the “crisis” in the steel business worldwide.

  Job #1 for Rühl was the unpleasant one of (as corporate types like to call it) “restructuring.” Klöckner’s cost reduction efforts went on for years and included cutting administrative and sales overhead, selling and consolidating locations, and implementing an unprecedented workforce reduction of over two thousand employees. The company, nonetheless, was still showing losses. It even stopped offering its normal dividend. Rühl was not happy, and he knew it wasn’t going to get any better in a hurry. In 2013, he was quoted as saying, “While we are anything but happy with the earnings situation, the numbers plainly show that thanks to the restructuring measures, we are making headway under our own power against the pressure on earnings from the ongoing negative market trend.”

  And yet . . .

  Even as the core business was being massively reduced and transformed to be competitive in the old regime, Rühl was thinking about what a new regime might hold in store.

  That same year, 2013, Rühl attended a World Economic Forum private session at a meeting in Dalian, China. The title of the session was “Fostering Innovation-Driven Entrepreneurship: A Global Perspective.”

  One of the key points made during that session was that increasingly, innovation was a collaborative endeavor requiring organizations to reach across boundaries to source ideas and create value. If the attendance at that conference was any indication, even traditional players were starting to rethink their customary competitive activity.

  Outside the steel industry, by 2013 digital platforms had gone mainstream. Airbnb (founded in 2008) convinced people by the thousands, and eventually by the millions, to utilize excess capacity by renting out spare bedrooms and vacant homes. YouTube (founded in 2005) showed that you could build a global media presence on the basis of user-provided cat videos (among other things) without needing a television network or content creation network. Facebook (founded in 2004) allowed users to send messages and original content to thousands, even millions, of people in the blink of an eye. And, of course, Amazon Web Services (launched in 2006) made it possible for anyone with an idea and an unsolved market problem to create a platform that could potentially solve that problem without the need for fixed assets or much in the way of computer hardware.

  At the core of these platforms’ success was that they all freed up and leveraged trapped capacity and then very efficiently matched supply to demand. In the language used in Chapters 3 and 4, they opened entirely new resource pools and created new arenas.

  Each of these companies radically redefined the arena they entered. None of them competed head-on with any existing player. Instead, they found a way to gain traction (and to drive exponential growth) by solving customer issues with jobs to be done better than they could be solved with the incumbent system design.

  It was this scenario that troubled Rühl. As he surveyed the arenas within which Klöckner competed, he saw massive inefficiency and considerable frustration among customers all along the value chain in trying to get jobs done. He described his thought process in a 2015 presentation.

  Our traditional core business in the value chain of steel is stockholding. So we are buying steel from the big producers, here in Europe and in North America, and then we are stocking the steel and then we are selling the steel to all kinds of different industries—construction industries, machinery, mechanical engineering industry, to the automotive industry—to all industries which are using steel. We have to stock the steel because we don’t really know what our customer is buying the next day, especially in the spot business, such as construction. The construction companies typically order the steel today, and then we have to deliver tomorrow. We are providing availability through stock holding, which is of course inefficient. But not only are we stocking steel, also the producers are stocking steel, because they don’t know what the distribution channel needs because we are giving them no information about what steel we need to be supplied with going forward. The supply chain is several times interrupted, very inefficient, and on top of that our customers are ordering pretty typically by fax or by phone. The only innovation I would say in the last ten to twenty years is that we are getting more and more orders by email.

  That was the trigger to think about, about two years ago, about the value chain and to think about what will happen when the world is changing. When the world is changing toward a digital world, is a company like Kloeckner still needed, or partially needed, and how could the value chain look like five years from now. That’s where we started.

  One of the insights Rühl had at that time was that if the steel industry didn’t begin to digitize, a new player could enter the industry and push them out—disrupting the business entirely just as the other platform players had disrupted industries they had touched.

  This prompted a vision for a cross-industry platform that could reduce friction in fragmented industries such as steel (but for others as well). The thought was that it would be not a proprietary Klöckner platform (although the company was developing that, too), but a more or less neutral digital space in which suppliers, customers, and third parties would be able to trade. In short, Klöckner would be leading the charge in going from a linear process with lots of ineffici
encies to an integrated ecosystem that could operate transparently.

  We’re Going to Digitize the Supply Chain . . . or Someone Else Will Do It for Us

  This was the beginning of Klöckner’s journey to do something about disrupting and digitizing the arcane steel supply chain. Prompted in part, no doubt, by the painful years of the old system failing, the company had the ambition to discover a brighter future. But where to start?

  A Fragmented Industry Offers an Opportunity for First-Mover Advantage

  The opportunity for a digital platform existed in the steel industry because the industry structure was a mess. While the supplier space was concentrated (over the years, mergers and acquisitions and the need for scale economies had led to consolidation), the producer/distribution space had become highly fragmented. End customers had no way of doing what most of us take for granted when we buy things—compare prices, check for availability, and place online orders, for instance.

  Klöckner is one of the larger players in steel. Most of the other companies run relatively small shops offering simple products and services. Without the scale to digitize themselves, these smaller players were likely to join the first platform that promised to offer them exposure to more opportunities while not imposing the cost of platform development on them.

  The existing setup was not very helpful to customers who were trying to get a complete job done. It did not offer third-party or complementary products such as insurance. It didn’t make price or service comparison easy. And it assumed that the steel players would handle everything, rather than let more specialized actors do pieces of the work (such as logistics). Further, if a customer needed, say, plastic pipes to complement the steel ones, they would be out of luck in trying to buy from an existing metals service center.

  A Future-Focused Starting Point

  Klöckner’s first attempt to figure out potential disruption was to create an internal “innovations” group within the company. Located near company headquarters and moderated by a professor, the group struggled. As one might have predicted, the conversations about new possibilities were shot down by naysayers who couldn’t get past the customary “we don’t do it that way in the steel business” orthodoxies. After months of frustration, the executives at Klöckner decided that an entirely new approach was necessary.

  Rühl, therefore, determined to use a separate entity to get things rolling. He studied how startups work and concluded that his transformation would need to begin with a dose of real entrepreneurial energy, using people who had different skills and backgrounds than the traditional employees who were toiling away at the headquarters in Duisburg. The goal was to quickly get to the “minimum viable product” (to use Eric Ries’s term), which would first demonstrate the capability to address specific customers’ jobs to be done as a proof of concept.

  Rühl began by asking two people to open a small office in Berlin in order to be close to the startup scene there and to pave the way for subsequent recruitment. The group went under the name Klöckner.i to differentiate its activities from those of the parent company.

  Hiring New People

  A digital transformation requires people with different skill sets than those possessed by workers in the core business. Klöckner set out very deliberately to build a team with members from many different kinds of newcomers. Instead of hiring from the steel industry, they hired from the likes of Amazon, eBay, and other online startups near their Berlin location.

  Decoupling the New Unit’s Technology Platform from That of the Mother Ship

  You know the old joke: “God created the world in seven days,” someone says as a challenge to the IT department. The reply: “Well, yes, but He didn’t have a legacy system!” The instinct of an incumbent IT department will be to force the innovator to operate with its technology stack and its controls. The problem with that is that it slows things to a crawl and forces the newcomer to work in much the same way as the old established business, even as it is trying to accomplish something entirely different. Klöckner saw the need for a separation and allowed the new digital teams to create their own technology platform.

  The first phase of the digital work was to create more or less standalone tools that were customer-centric and dealt with specific pain points that existing systems did not touch. In the second phase, Klöckner planned to expose its own customers to the digital tools, allowing them to choose how they wanted to connect on the digital platform. The third phase Klöckner envisioned was to open the platform to its competitors, allowing the experience of doing business on the platform to be as integrated for customers as possible.

  Building In Connectors to the Core Business

  Rühl realized that corporate Klöckner had the answer to a pressing problem that bedevils many would-be platform companies. In short, to be a profitable platform, you have to match would-be buyers with would-be sellers. It is often a chicken-and-egg problem of the first order, and failing to establish sufficient interest on both sides is a major reason platforms collapse or are stillborn.

  For example, General Electric’s efforts at a similar digital platform for manufacturing businesses focused too much on GE business unit needs to be of much interest to external parties. The company ended up facing a reboot after disappointing results. In Klöckner’s case, Rühl realized that its position in the value chain meant that it could populate its platform with both buyers and sellers.

  This addresses a point that often confuses leaders in established businesses, which is that setting up a startup unit to do great things is pretty easy, but without strong ties and translation mechanisms back to the parent firm, it’s also fairly useless. It’s the connection to parent capabilities that leads to corporate revitalization, and that is often not thought through very well.

  Rühl in particular understood this point. “Our salespeople have to be convinced that this is our future,” he said in his 2015 presentation. He recognized, however, that this was likely to be a difficult undertaking, as the new tools and approaches would disrupt the ways in which they had earned a living for so many years. Among the programs Klöckner invested in to make this buy-in a reality was its “digital experience” program, in which sales employees from different branches of the traditional company could take three- to four-month assignments in the digital division, Klöckner.i.

  One of the things I find most compelling about Rühl is his respect for and sensitivity to the issues that the people in the incumbent business are likely to face. As a modest example, he explained to me in November 2018 that during the initial phases of the transformation, he was careful to dress as he conventionally had, with a conservative suit and tie. While this was seemingly a small thing, he clearly meant it to signal that he was not abandoning the core business for the shiny new objects of the digital system. Rather, he strongly believed that the two had to work together to realize the benefits of their association.

  The company also implemented what Rühl calls “non-hierarchical communication” using the collaboration tool Yammer. Rühl can communicate with people all across the company he doesn’t normally come into contact with. Anyone has the right to post a question or an observation and to get a discussion started. For a traditional company, this was a big, big departure from the norm.

  Another innovative feature was the company’s “Fuck-up nights” (honest, that’s what they call them), where they invited startup founders who failed to come in and talk about why they failed. The program was then extended to allow employees to talk about things that had gone wrong and what they learned. Such gatherings are invaluable in trying to break down the fear of failure that often accompanies barriers to innovation.

  Klöckner also made a big investment in digital training for employees in the traditional business. Employees were encouraged to pursue this opportunity during their working hours.

  Among the side benefits of creating bridges between the startup parts of the business and the existing core was that the initiative began to gradually change t
he culture of the core. “Through in-depth communication with many of our employees, we have managed to bring them into the digital age,” Rühl said in 2017. “As a result, they understand our digitization strategy and know how to contribute to making digitization a reality. They also adopt increasingly agile working methods from the start-up scene and act in a less persnickety manner than they did in the past. We as an organization have thereby become much faster and more agile overall.”

  Four years into its digitization journey, in 2017, Klöckner reportedly earned 17 percent of its revenue from its digital channels, which it attributed to a return to profitability and growth. Its goal is to make that number more like 60 percent by 2022.

  Inflection Points Challenge the Assumptions of How You Run Your Business

  We now come to the heart of why inflection points wreak havoc on the management practices of once successful incumbents. I’ve defined an inflection point as something that fundamentally changes the envelope of constraints in the arena within which an established organization operates. Back in Chapter 3, I broke these constraints down into the following categories:

  They can change the pool of resources that are being contested.

  They can change the parties trying to grab some of that pool of resources.

  They can change the situation in which the contest takes place.

  They can cause one job to squeeze another out of an actor’s consideration set or reduce the resources available to do that job.

  They can meaningfully change the consumption experience.