The State Of Innovation | A Conversation with Rita McGrath & Alex Osterwalder | BoS USA 2019

Rita McGrath (Author, Seeing Around Corners) & Alex Osterwalder (Founder, Strategyzer)

At Business of Software USA 2019 we were joined by two titans of innovation thinking. Rita McGrath & Alex Osterwalder both gave fantastic talks at the conference and shared enthusiastically in the 3 days of learning. It’s probably fair to say that Alex made more notes than anybody!

Rita & Alex sat down together on the third morning of the conference to discuss the state of innovation as they see it in companies across Europe and the USA. A fascinating 10-minute discussion unfolded between two of the smartest people we know.

Watch the Video & Follow the Transcript below:

Video

https://businessofsoftware.wistia.com/medias/mt1at68ojy?embedType=async&videoFoam=true&videoWidth=640

 

Transcript

Rita McGrath: So we thought while we were here at Business of Software it would be kind of fun to talk about the past, present, and the future of innovation in large organizations which is what a lot of us spend our time betting on. So why don’t you start – what do you see changing?

Alex Osterwalder: I think there’s been quite a substantial change over the last five years, that companies are starting to test their ideas. So you have teams out there that are using these methodologies. I think they’re getting more serious but investing in this. And it’s beyond innovation theater. So of course everybody’s doing it but they are few now that are really taking it seriously. Are you observing the same thing?

Rita McGrath: I think some companies are getting a lot smarter about it. I think there’s sort of three groups in my mind. There’s the ones that are really getting smarter about it and they’re learning and they’re taking it seriously and it’s a corporate priority. And that’s great. Then there’s the group that still is dealing with innovation theater. You know we’re going to send everybody to Silicon Valley you know 4000 post-it notes you’re going to dot on the wall. It’s going to be so cool. And then they get back home to Boise or Duisburg and say what do we do? And then there are the ones that kind of didn’t really know the world is changing around them that haven’t yet figured out what to do. And in some cases those firms are the ones I worry about – they’re just going to be run off firms. You know they’re just not going to be able to reinvigorate themselves. And then you know there’s an interesting class of firms that never lost it. And then thinking here Corning maybe 3N,some of the really world class innovators and they’re kind of looking around going “We don’t understand what all this fuss about”. And then I think the last thing I would observe that’s new is this direct to consumer movement among the tech companies (since we’re here at a software conference that’s kind of interesting). What digital has finally done is it’s really changing the business model. So when you used to have to have assets you used to be constrained by all these restrictions, you can buy so much more now on the open market. These firms go right to the consumer, and companies like Procter and Gamble and Wal-Mart are just sort of stand here and they come up.

Alex Osterwalder: And then they try to acquire but then often it’s difficult right because their company valuations are going up. One of the things I see a lot is the lack of power of innovation inside the company. So they still call themselves pirates – and pirates in history would kill… some are literally in a garage, in a basement. So do you see the same challenge in innovation, while we’re starting to get more serious about it while we’re really investing in it, there’s just not enough power there. Right it’s not at the right level. You don’t have the right people we still say oh we need a fresh somebody hires somebody fresh from university really they’re gonna have no clout and nobody’s going to take them seriously. Do you observe the same thing?

Rita McGrath: Absolutely and I would say the fault to me lies at the board level. So when I look at a company that’s doing an innovation process which is really taken seriously, division-level leaders are held accountable for what’s going on. And so by definition the innovation people have a lot more power in those things and I recall a story (a historical story but I think the essence of it is still true) at Emerson Electric the CEO had the innovation war room next to his office and every major project in every major division was color coded by division. Its height on the wall represented how much of an impact it could have for the firm. And when you went in for a review with this guy you had to take a walk around the innovation war room and God help you if your projects weren’t moving down the wall. And I think the better run companies are doing that and so innovators have a lot of power. One last thing on that – I would say the there are at least three leadership roles I see as being involved in innovation. So you’ve got your entrepreneurs, and these are often people that love blank sheets of paper, starting with ambiguity and you know I’m just gonna go discover what users need and that’s great. And then you’ve got the executive people sort of setting broad direction and here’s what we want to get to. And then there’s this person in the middle I call the innovation Sherpa. These are often people who’ve been with the company forever. They know where all the bodies are buried. They have political capital. They can make things happen. And I just think a lot of times we don’t recognize how important that role is, especially in corporate innovation.

Alex Osterwalder: There’s one thing I want to point out also for the audience at Business of Software is this test I stole from you where you say “how do we figure out if a company is serious about innovation”? Let’s look at the agenda of the CEO and if you make 20 or 40 or 50 percent of their time is not dedicated weekly to innovation, no innovation is going to happen! And then the second one you said is let’s look at the last three big important meetings – was innovation on the agenda? And that’s not just for the big ones right. It’s also for smaller to medium-sized companies. Do you see some change there that leaders are investing more time? Do you have some data even on that kind of experiment?

Rita McGrath: You know it’s all over the map. I think the better companies obviously do. I think… here’s the challenge from the CEO level: and this is from an American perspective and maybe you can offer a perspective from Europe. Our financial system was built on the presumption that competitive advantages, once achieved, were going to last a long time. So we really really struggled with appropriately valuing innovations. It’s very hard people constantly said things like well what’s the ROI on this idea that you have mining artificial intelligence and 3D printing, and you know latching it to walls I mean I don’t know what the idea is in that vision. We also don’t allow companies to transform. So the pressure to meet the quarterly number… But it’s more than that, it’s not just a quarterly number to manage the whole lifecycle of a competitive advantage. I just think our financial system isn’t really geared towards it. And in the US anyway a lot of executives especially larger companies are being rewarded for the shorter term, surer, more predictable path. And it leads them to missing really big inflection ones which is course what my new book is about. And I think the exhibit A is General Electric that made a huge bet on fossil fuels just as renewables were becoming more affordable. And at the same time climate change was getting the Paris Peace Accords attentions, stuff like that. So what do you see from the European perspective?

Alex Osterwalder: So I’m still fascinated by Paul Polman and Unilever and just before he retired, listening to him talk about what they did. And one of the first things they stopped was quarterly reporting. Right. And changing the investor base saying look if you want to invest with us, prepare for the long term. And I found it very interesting because that’s a public company. And they did it despite all the pressure on quarterly reporting. I remember telling somebody this and you said well that’s illegal. He’s not the owner of the company. He was firing his shareholders the owners. But something drastic like that has to change so we’re more long term. Another example I like, and that’s a Swiss American company, is Logitech. So Bracken Darrell came in a couple years back and he turned around the company or a reboosted it, you know a company that was relying on the P.C. industry, mouse sales were going down, but took that long term view and took some of the money and capital and resources from the business that was slowly going down but did resource reallocation early enough, not waiting like a Kodak which didn’t move that capital seriously enough. So there are examples that are trying to do that. And Eric Ries you know one of the proponents and coined actually the term Lean Startup is now investing in his time in the Long Term Stock Exchange, so that is something that seems to start… but I don’t know if this is going to get enough traction. Because you know why would a CEO take the risk? It’s very risky to make a move like Paul Polman. Do you see their mindset shifting a little bit.

Rita McGrath: I think it will once boards start to get their feet to the fire! So my little bright spots are Larry Fink at BlackRock basically saying we want to talk about purpose, we are here for the long term, we want you guys to be here for the long term, and we don’t want you extracting wealth from your companies that should be reinvested. So when you’ve got Larry Fink saying things like that, that starts to change the business roundtable. And I think more broadly and deeply we’re at a very interesting inflection point now where in a lot of our democracies people are saying this isn’t working for most. So we really have the ground on this change.

Alex Osterwalder: I think it’s happening actually in the smaller organizations. Take the Business of Software Conference – you have a lot of entrepreneurs in small to medium-sized businesses, some reasonably big. They’re looking at the world in a different way. Culture is a big topic – and for me that’s a little bit like a precursor and what we’re seeing here is probably something that’s going to move towards larger companies. Otherwise they’re going to lose the talent they’re not going to be able to hire.

Rita McGrath: That’s true. That’s absolutely true. That’s one of the reasons I come to Business of Software – this is where the future starts. Great talking to you!