"You will have a higher probability of success when you allow people to be small

IMD Business School professor Bill Fischer on the importance of innovation

Bill Fischer isn’t your usual business school professor preaching strategy from an ivory tower. Given that he tutors senior management professionals on how to better steer their organisations, he can’t afford to be like that. Fischer is in sync with how the world is changing and how companies — from the chaebols of Korea and giants of China to cutting-edge Silicon Valley firms — are dealing with change, be it technology, geographical shifts or whatever else. When we meet for a 45-minute interview session at IMD Lausanne, where he teaches, I find myself in an irony of sorts — I am raving about Switzerland (most normal people on the planet would) and he is all praise for Mumbai. “I love the place, the culture, the buzz…what a wonderful city,” he says, with a glitter in his eyes. When I interject, “...but the traffic congestion, potholed roads…” he insists that he will take me around Mumbai during his next visit and make me see it through his eyes. His fascination for Mumbai articulated, he gets back to discussing strategy, innovation and reinvention. Excerpts:

You say that when companies do well and innovate, it is an outcome of right management choices.  When you look at all the outliers — Bell Labs, Ford, Microsoft, Apple — what is the strategic management decision that they took that lead to that outcome?

In the cases you mentioned, those teams knew exactly what they were trying to do. In every one of those cases, the objectives, the dream, the vision was very precise and very inspiring. That is really critical. The other thing they did well was that they hired for skills, not attitude, because they needed the brain power. They made it easy for smart, engaged individuals to understand that if they did this, they will be better off, not just financially, but because they will be famous for being part of a successful team. Those smart guys then put their heart and soul into the project. You think that will be true everywhere. It is not.  

Is that the reason companies often fail to innovate?

Because they are successful! The greatest barrier to innovation is success. If you have a successful innovation, usually it lasts for some time and after that you begin to compete on the basis of other things. Usually, those other things become increasingly price-related. You lower your price, you have to get cost down and people begin to resist change. When you resist change and say, let’s wait, you are dead. That is Nokia, Research in Motion and Kodak for you — great companies who waited until it was too late. You need to make a transition when you have resources and cash, and when people are in a good state of mind to change.  

But how do you know that the change or the transition is going to be permanent? How do you know that it is the right time — not too early and not too late? 

The world has become too uncertain; so you need to make big decisions and you need to make them fast. Classical management theory tells us to go by the RoI (return on investment) calculations, but we can’t do that any more. The challenges are coming from places that we have never seen before.  If you were Nokia, some years ago, you were looking at Motorola, not Apple, because they weren’t making phones. Who knows where the future is going to come from? So instead of optimising now, you need to be probing the future, saying, I know I am going to be wrong 80% of the time, but I can’t afford to be wrong 100% of the time. So you need to probe the future with prototypes, see how they work and kill the ones that don’t work very fast — fail fast. The ones that do work, make sure that they are worked on separately from the existing business. This is harder for people to do because it challenges the expertise and authority of people higher in the hierarchy. As an organisation, you have to deal with the success of the team working on new projects and the fear of existing leaders about losing control. 

Can you tell us about large companies that have managed to innovate successfully?

Nestlé is a huge company down that road. Everything else in Nestlé is B2C, but it created the espresso, which is a B2B product. Espresso sells to an elite market while everything else Nestlé had ever sold was for mass consumption. It involved sound technology and intellectual property; Nestlé had never done that before. This was a huge change. The way it did that was to take the espresso and let it out of the big company, so it operates as a small independent company without the burden of Nestlé’s success. It sounds easier now, but they also struggled with it. 

Another company that has been able to do this successfully is IBM — it started the PC business by doing it that way. Their global services unit also runs as an independent business. Haier is another excellent example. A key innovation of Haier’s management structure is inverting the traditional relationship triangle — where managers are at the top, followed by middle management, then a sales team and finally customers — to one that positions customers at the top. (see: The customer first approach). At Haier, the management structure pivots around ZZJYTs (Zi Zhu Jing Ying Ti, which in English means independent operation units). Each new project or market opportunity leads to the formation of a ZZJYT, a dedicated small team of workers with a separate budget, functioning almost like an independent company. Haier is now a platform for small businesses under the Haier logo. It is more of a venture capital company. It is easier for them to be faster, and more innovative because they are constantly seeking new businesses. Generally, you will have a higher probability of success when you allow people to be small and independent rather than be part of a large legacy company. 

You said that Haier broke the first lot of refrigerators it produced because they were of poor quality and it didn’t want to push out bad quality. Now, that kind of decision takes a great amount of courage because it means you have to take a huge financial hit today in anticipation of a benefit coming in instalments over many years... 

Without a doubt, companies that take this leap cannibalise their own margins. But if they don’t do it, they lose more. Haier’s refrigerators didn’t work — you can’t build a business by making refrigerators that don’t work. That quality problem should have been caught before but it wasn’t. Now, the cost of breaking the bad machines was less, because it would have had to repair them anyway. So the impact was not as great as the shock value. Thirty years later, people still remember the episode. What a huge advertising tool it was! Thus, the smart managerial choice was to not sell those refrigerators, instead refocus on high-quality products and charge a premium. So I don’t see that as a hit. 

What I do think is that a big financial hit is when a company goes for a big change before it has exploited the profitability of an existing project. Intel used to do that a lot — 286, 386, 486, Pentium. This had two effects: one, it completely destabilised its competitors. Not only did Intel remain the dominant player in the market, it was the brand everybody wanted. AMD was constantly being surprised. Intel didn’t think of it as cannibalisation but an expensive strategy that will pay off. You are just doing it earlier than you have to because eventually you will have better products and services than your competitors and that will pay off.  

What caused Sony’s innovation demise?

Two things happened simultaneously. First, the world changed outside the organisation. From analog to digital, from west to east, globalisation, a whole bunch of stuff was going on. At the same time, co-founder and chairman Akio Morita retired. The generation that replaced the founders were middle managers moving up who grew up with analog. Not only were they out of step technically, they were not as flamboyant or charismatic as the visionaries they were replacing. They were a bunch of engineers who had served their time. They had no confidence in themselves and couldn’t afford to be daring. So, they fell back on their financial figures and on their friends. All of a sudden, having a good idea wasn’t enough. Dreaming was not acceptable. The whole thing began to fall apart. 

You talk about the difference in culture between Sony and Samsung. What is it?

Well, it starts with a dream. Sony’s dream is to be a company that creates unique products for the consumer and they have a great tradition of branded, elegant, beautiful, high-performing products. Samsung started by making invisible products — they were making the insides for other branded manufacturers, so they needed to keep costs low and be highly repetitive in their manufacturing. So the two companies start with starkly different dreams and DNA. Both companies were very successful: Sony because of the way it went to market and Samsung because of its cost-competitive manufacturing. 

Now, all of a sudden, Samsung has a different dream. The dream is to be a Sony or an Apple. But they are not changing anything else. My sense is that if you are Samsung, you look around and say we can design a product that looks pretty much like that and does pretty much those things. Not to just make a copy but to emulate. They do it really well and cheaper and faster and, in fact, extend it to a zillion different applications. So whichever way Apple goes, Samsung will catch them at some point. But Samsung can never overtake, because to overtake you have to encourage dreams, you have to try different things and be original. They don’t have that. Any originality they have is a hired hand (outsourced) and not part of the club or the main company. These hired resources can give a boost for some time, but they are not changing the inside of the organisation to catapult them to a higher level.

So you don’t think Samsung is going to replace Sony and Apple?

No. In fact, I think that somebody will come out of nowhere and surprise Samsung and Apple. I read a piece in MIT’s technology review that made the argument that mobile devices or iPads or iPhones are going to be as dead as the PC in a few years. I wondered how can that be, because we know mobility is our future. But no, what they are saying is that mobility will continue to be our future but portability will die out. We will not carry these things around, our mobility will be embedded in the places we visit. For all you know, this might turn out to be completely wrong. But if you are in this business, you can’t afford to bet that this is irrelevant. It takes us back to our point on probing the future. There are computer companies that have already missed the tablet. Now, they could end up missing the next big thing too. How many of these can you afford to miss? Apple and Samsung and maybe even Google have invested too much in portability to give it up easily. They are going to hesitate to move in that direction. But there is somebody out there who is not going to hesitate and they might become big.  

Isn’t the idea of probing the future driven by resources at your disposal? 

Companies are afraid of probing because of the risk of getting it wrong. That is because they have committed resources and time.  If you reduce the resources and time, your fear will go down. That is the beauty of prototyping — you don’t spend a lot of money and time. Instead of making big episodic decisions, you make daily decisions. So, probing and prototyping is the way to move into the future. The worst thing in the world is to spend $100 million in three years — by then, it’s too late. You need to have your finger on the pulse of whatever is going on in and around your business and make the switch when you are still doing good. 

What kind of questions should a company ask itself before making a big transition? Is there a framework to meet the transition through the S-curve?

Good question. I have been drawing the S-curve since I was a young professor. Historically, on the vertical axis in the S- curve are attributes — speed, aircraft, weight, power, whatever. But what we now know, thanks to Steve Jobs, is that that is the wrong way to think. That vertical axis ought to be, in my terminology, customer dreams. You have to draw what the customer wants. What we should be asking is not what we should be making but what customer needs are we serving. For example, you may be making drills, but the customer wants holes. If you do it this way, you open up the probability of looking outside the existing industry to what could be a solution for what comes next. We wrote a book about this called The Idea Hunter: the point was that people who come up with a different idea are not necessarily smarter, it is just that they look in different places and they know where to look. 

The second thing is that you need to find people who are living in the future rather than people who are living in the past. What do I mean by that? Eric Von Hippel of MIT talks about ‘lead users’. A lead user is someone who doesn’t care about being a competitor, doesn’t even care about being a customer but is trying to solve the problem that your next-generation product will have to solve — he is in the future. If you find such users, you will have an advantage over everybody else.  

There is no company in the world that has lasted forever except Philip Morris because it is in the cigarette business, which has given them infinite life. Should companies then reconcile to demise at some stage?

Let me quote two friends. One is Charles Fine at MIT Sloan School of Business. Charlie says that there is no such thing as a sustainable competitive advantage. With the probable exception of the New York Yankees, everybody comes down to average. At IMD, Phil Rosenzweig says that over a period of time, even great companies revert to mean because everybody in the industry eventually gets better, with executives moving from one organisation to the other and sharing information. I think we shouldn’t therefore look for perpetual success; what we ought to look for is whether companies are doing things that will put them at a higher probability to outperform over a significant period of time.

Another friend of mine, Michael Raynor, who has written a book called The Three Rules, says that the first rule in business is that performance (product attributes) is more important than price. If you are going to invest, invest in making the product better. The second rule is, emphasise revenue growth over cost reduction. The third rule: there are no other rules. The essence is that competition is a great leveller. Organisations that sustain are disruptive in their own right. 

One of the great things about the Haier story is that they never waited to the point where they said, ‘If we don’t do this, we are in trouble’. They always did it beforehand, when resources were in abundance and people were not in trouble. The lesson for companies is that instead of investing in outcomes, products and offerings, invest in an organisational culture that gives you a higher probability of adjusting to an uncertain future. 

When do you think reinvention can yield results and when do you think it cannot?

I think you should only do it when you can go the whole way. You can’t do it piecemeal. You are fighting a battle, so you need to do it all at the same time. When you plan the change or attempt something new, you take a group offline and then you do it all at once. That way, you build a mutual reinforcing mechanism; you reassure people that they are not at unusual risk. If the vision is inspiring, it will get the attention of your key people. But, but, but, it requires huge self-confidence on the part of the leader. Charisma matters. Part of the charisma is about having the conviction and effectively conveying that to people. You better have thought it through. Don’t do it when you can’t make those commitments. Don’t do it if you can’t get the right skills or use those skills in the right way.