Clark Gilbert - From Resource Allocation To Strategy

Before we start with part two of from resource allocation to strategy. This time with the co-author of this book, Clark Gilbert, I want to thank our sponsor Kyndryl, who run and reimagine the technology systems that drive advantage for the world's leading businesses. With a unique blend of AI powered consulting, built on unmatched managed service capability. . Kyndryl helps leaders harness the power of technology for smarter decisions, faster innovation, and a lasting competitive edge.

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Our guest's purpose in writing this book is twofold. First, to describe the process by which theory is built using an example of the 35 years of research that commenced with Joe Bower's 1970 model of the resource allocation process that we talked about in part one. Second is to familiarize the audience with a series of important findings concerning the management of strategic process that enabled researchers to think about the model in new ways.

He and his co-author hopes that the pattern of research process presented here might provide a common language that helps us to visualize independently derived insights on the resource allocation process. This episode is from the book that he co-authored called Anomaly Seeking Research, 30 Years of Development in Resource Allocation Theory. Which he co-authored with his great friend and a gent that we did an entire series on The Great Clayton Christensen.

It is always a pleasure to welcome friend of the show, and co-author of this baby, from Resource Allocation to Strategy. Clark Gilbert, welcome to the show. Ah, it's great to be back with you, Aidan. It's always brilliant to have you on the show. was trying to prevent you from giving away some of the gold before we came on air about how this came about, how you co-authored this with Joe, Yves Doz, clay, who we mentioned as well.

Give us a little bit of a helicopter view of how this came about. Yeah, at the time I had just graduated from the Harvard Doctoral program and I was Joe's latest doctoral student to, we started looking at all of Joe's doctoral students and over about a 15 year period, almost every other year, Joe's doctoral students had won the best paper in the Academy of Management.

How could one person, Joe Bower, have so many students built their whole careers over research, under Joe's instruction and have so many of them be recognized to Monda, Tom Eisenman, Don? So me, clay Christensen, it was just, back to back to back. And you know, some of us would like to think, well, it's 'cause Joe had really smart doctoral students. But I think there was something to the pattern.

Joe had arrived at a framework in his 1970 work around resource allocation that just a series of us were able to follow on and pick up have unique insights by using that original lens of resource allocation , It says on the cover that, , here's my copy.

From resource allocation to strategy and it said, if you wanna understand an organization's strategy, don't look at their formal statement of strategy. Look at how they allocate resources, and more specifically, what are the criteria that shape the decisions around resource allocation and embedded in those criteria is the real strategy of the organization. Joe hit onto that insight. He mapped how the resource allocation process worked.

He showed that it wasn't a budget meeting decision, it played out over time. It was multi-level. Joe described it in a way that opened it up intellectually for the rest of us to come along and start to apply it to other questions of strategy. With Clay Christensen, Clay took Joe's research on resource allocation and showed how customers can capture the resource allocation process.

and therefore he connected resource dependency theory to resource allocation theory, and that led to the innovator's dilemma. Don Sull had shown how capital markets could do the same thing. Tom Eisenman showed how big bets in industry shifts meant that corporate allocation processes didn't work as well as entrepreneurial founded CEO led companies. And I had used it to show how dependency theory could capture the resource allocation process.

So every one of us brought new insights to new phenomenon, and in the book we call 'em anomalies to the theory. But it all started with that original insight from Joe, that resource allocation processes shape strategy. And they aren't one-time events, they're a process. It's not the resource allocation meeting, it's the resource allocation process, which is iterative. plays out over time and it's multi-level. Amazing man. I can't believe you pulled that off.

all of my work now is I work with ecclesiastical efforts in our church and I help our universities, but, I spent so much time in these, theories and pulling it together I think what we did in this book is this had happened organically, but no one had gone back and looked at why did this happen? How could Joe produce so many? Award-winning doctoral students.

And yeah, a few of them were geniuses like Clay Christianson, but other guys like me, we had a powerful lens to look at problems that gave us insights that other people had missed. And the same humility you showed there. I saw in Joe, I called him the hit maker because I like, he's like Simon Cowell picking people in America's Got Talent, you know? He is like, made so many people who are great business leaders, thought leaders, authors, yourself, clay, Eisenman.

I will say, and all of those people you mentioned, they're bright and they're talented, but Joe gave us a framework to look at a problem. That I think the strategy scholars never understood. And so it gave us a unique insight you had all these strategy scholars looking at applied organizational economics and, IO theory, applied to kind of decisions. And Joe, because he had said, no, it's not a decision.

It's a iterative process of repeated decisions that's embedded in an organization that's multi-layers, where roles are inevitably in conflict and people have differing perspectives. And it just, it let a group of people who I think were hardworking and smart and well-trained. But on top of that, it gave us a lens to see things that maybe other people might have missed.

the way I liked you put it in the book, in this chapter was, it's like a. Relay race and you're passing the baton to the next person. And actually sometimes there's multiple people running the race at the same time, running the same race. And you have this layer keeping going, going, going. And that's part of the role is to actually pass that bat on to the next one. And if the baton falls, that's actually anomaly.

And if you see it not as a failure and you see it as a deviation, then it can lead to better places. Maybe we'll say a word on that.

That idea of anomaly is key to this chapter. Look, anomaly seeking research, that idea came from Clay Christiansen looking at a lot of our work, and he is like, Hey. What we did is we took anomalies and then used the lens of the resource allocation process to look at the anomalies.

So it was like taking Clay's insight about anomalies and Joe's, uh, years of work of mapping how the resource allocation process works, when I described Joe, what Joe did in 1970 was it was like, hey, strategy is not you know, you talk to the consultants at McKinsey or the Michael Porters of the strategy department at Harvard and they're like, strategy is like a one-time you do a study. Joe's like, no, that's not how it works. Strategy's embedded deep in an organization and it's multi-layers.

It plays out over time. It's not a single decision and it's invariably connected to how resources are allocated. that was Joe's big insight. we're gonna use a resource allocation process to go in and look at that anomaly. So that's where Clay's point is, we see an anomaly Joe's contribution is, and we're gonna explore it through this lens of resource allocation.

And I knew, resource allocation theory from Joe I was working with Clay why leading firms fail in the face of disruptive innovation. my anomaly was Clay's theory, the innovator's Dilemma said the incumbent will never invest in the disruptive innovation. That current customers would capture the resource allocation process and trap the incumbent firm. we were looking at the internet and newspapers. They weren't missing the innovator's dilemma. They knew it was coming.

They could see it loud and clear, and they were telling everyone, we are committed. So that was the anomaly. The existing theory from Clay said just miss it and never fund it. I was seeing newspaper organizations looking at the internet in a panic, they weren't missing it. They were pouring billions into this new technology and it wasn't working. I remember, so that was my anomaly. And I was looking at it through, you know, the resource allocation process. And there were two literatures, Aidan.

One was the, the the psychologist like Kahneman and Tversky, said, in the face of threat, incumbents become risk seeking. actually gonna take more risk when they feel threatened. we could see that going on with the newspaper industry. But the social psychologist, not the psychologist, the social psychologist. So this was like Jane Dutton at university of Michigan. Her scholarly heritage said No in the face of threats, incumbents lock in and become rigid. And I was saying, wait a second.

These two literatures are saying just the opposite. So I had an anomaly. Psychologists would say fund it, but they'll fund it aggressively. The social psychologists were saying they'll fund it, but they'll be very rigid. And I was like, okay, none of these theories explains what's really happening. And I remember I was sitting in a doctoral seminar with Clay and Joe and we were, look, we were reading the literature on Kahneman, Anderski and Risk Seeking in, in Threat.

all of a sudden I said, wait a second. They're talking about different things. Kahneman and Tversky see risk as willingness to spend. And Dutton and Jackson and their colleagues saw risk as a willingness to change underlying routines. And the right there that day, I said, they're, these literatures aren't in conflict. measuring different constructs, threat is creating risk seeking spending, but it's risk rigidity.

Routines. And I, that's what led to my, you know, routine versus resource rigidity. And suddenly, I, I was sitting in the doctoral seminar, I hadn't even collected my data yet, and I'm like, any idiot from this point on is gonna find something really compelling in this data. And that was, it was my eureka moment. And I knew I didn't have to be as smart as Clay or anyone else because I had stumbled into an anomaly. And there was a theoretical way to explain what was going on.

and that was my eureka moment. But Clay had it with resource dependency. that led to the Innovator's Dilemma. Tom Eisenman with capital markets, Don with customer dependencies. So each one of us, because Joe had given us a framework to say, Hey, strategy is not a moment of decision making. Strategy plays out over time. It's multilevel, it's iterative, and roles are inevitably in conflict. And we ended up all seeing something no one else had seen.

And it wasn't 'cause we were smarter or more insightful than those who came before we looked at the problem in a different way. I love what lenses do, the lens of theory. I remember Clay saying this before that everybody's using theories even though they don't know they are because they have a lens or a paradigm, and it's not until somebody comes along and challenges that paradigm. This is what you talk about in this chapter, that this is the Thomas Kuhn stuff.

This is people coming at it from a different ways, and usually it's an outsider. Yeah. and if you look at the history of this, Aidan, we were seeing anomalies in two different ways we were outsiders because the strategy literature was looking at this as a strategic decision. By a single decision maker at the top of an organization.

So before any of us got started, we had already come at it with a completely different lens from Joe Bower, which is the idea of a decision maker at the top of an organization completely misses how strategy is really made. First of all, it happens through the resource allocation process. And second of all, it is not an event, it's a process. That was Joe, you know, and Joe drew all these charts.

And I just wanna explain it through, implied industrial organization, economics and I want to put it into a formula. I watched Joe went in and spent years. Watching how strategy is made, and he realized it's made through resource allocation decisions. They're complex, they're multi-level, they iterate over time and decisions and information is spread asymmetrically across the organization.

And that one that, so first of all, our whole lens to looking at strategy problems was anomalous to the strategy theories at the time. Even today, I have a son going to work at McKinsey and they'll do all this brilliant strategy work, but we have to remind them, hey. IT strategy is not a McKinsey project and it's not a CEO's one-time decision. Those are important. they make a big impact, but strategies play out in everyday decisions deep in the organization.

That insight led Clay to the innovator's Dilemma led Tom Eisenman into seeing how big bets had differential impacts depending on how you were organized. Tomo Nota showed capital market dependencies. Don Sull showed customer dependency. I showed resource versus routine rigidity. Every one of us got something novel out of that. But it all started 'cause we were looking at this in a really different way. You mentioned there, eisenman's framing of it, but your framing,

. Cognitive framing becomes important. Many of our audience, Clark, as you know, were you in the media industry, they were the change maker trying to drive change. They met this resource rigidity, threat rigidity, constantly. one of the reasons I do the show, as you know, is I want to help people, give them a language for this to understand it a common language. this is why this book is so important, and I don't want it to get lost to the annals of history. I love that you're doing this.

'cause we wrote this book really for a largely academic audience and maybe a reflective strategy thinker. but what you're doing with these series is taking these to a broader audience, and I think they're really important. I think it's important for CEOs to understand how strategy is made. I think it's important for heads of organizations to understand how strategy is made and for consulting firms, you know, all of the McKinseys and the BCGs of the world.

If they could understand how strategy's really being made inside of their clients, they would be so much more effective.

And look, even for me inside of a religious organization, I run the Church of Jesus Christ educational system with B-Y-U-B-Y-U, Idaho BYU pathway, a million students in our educational system. But if I think strategies made just by me and a few others at the top of the organization, I will miss what's happening.

And the dependencies and the asymmetries of information, the asymmetries of decision rights inside the organization, I was in a meeting recently with one of our leaders in the church, and he said, where will this lead? and he wasn't concerned just about the decision that they were about to approve. and we think these leaders are prophet, seers and revelators, and he's saying, where will this lead? And he was saying, it's not this one decision.

will put in process a series of decisions that might change direction of the church educational system. And so, I find even in my ecclesiastical settings, this is important. And, and Clay, in his book how will you measure your life? did such a beautiful application of Joe's original insight, and Clay said, look, if you wanna understand an individual strategy, just like we've done this for organizations, you know, I'm studying media and Tomo Noto studied cell phones and clay studied disc drives.

Don Sull, studied the tire industry, and Joe Bower studied the cable industry. Clay said, what about us as people? If strategy isn't a single decision, isn't what you say your strategy is, but it's how you allocate resources, Joe said, don't look at, you know, Intel or, , and see what their CEO says the strategy is look at how they allocate their resources. sometimes resources is money. Sometimes resources are the people you hire, but sometimes resources is how you spend your time.

that was Clay's insight with how you measure your life. He just took this work we've done in industries and he said, at all the Harvard Business School graduates over a 25 year period. None of them starts out and says, my strategy in 15 years, in 20 years, I'm gonna be estranged from my wife, have no relationship with my children, be filthy, rich and miserable. No one started with that. Maybe there are a few, crazies, but, most people didn't say that.

But Clay said the resource allocation process for individuals cause them to every day , if , their criteria is, I'm gonna do what makes me feel accomplished and successful. in the short term, that means I miss my daughter's soccer game. I miss anniversary. I'm up late. I take another flight on the weekend because it's making me feel like I'm successful. the cumulative pattern of those decisions causes people to drift away from what they would've said was a real strategy.

the actualized strategy came from these everyday decisions that played out over time. Joe's students have used that original theory around resource allocation drive insight to industry, evolution and insight into human behavior and what really makes people have successful families and successful lives. I'm so glad you said that, man. I was only thinking about this during the week about my own allocation of time. One of the things I did, so I live in Ireland, which is famous for alcohol.

Unfortunately. I don't drink. And one of the reasons people ask me why I don't drink, and I was like going, I have so few weekends, if you think about it with my children for before they're 18 and they don't want anything more to do with me. Certainly not for the whole weekend. And I was like, and if you're, if you're going out on a Friday or you're having a few glass of wine, you're not yourself on the Saturday, you're not real, you and you're not, certainly not whole present.

And then a guy I had on the show, you probably know Paul Nunes, who wrote the book, jumping the S-Curve. He said in that book, he quoted, he was a massive Hemingway scholar and he wrote that there's that book, the Sun also rises. There's a quote where it says, how did you go bankrupt slowly then quickly? And it's this kind of slow drift towards wherever you're going, but it depends on the decision.

And I'm coming back to the book here because one of the decisions Joe talked about in part one was I. Take for example, Opel, the company in Germany and the case study of that, that the decision did come from on top, where this local guy was asked by his boss, what are you gonna do about the East German market? And that was it. And then he took action. And I'd love you to riff on that a little bit, Clark. It's so funny you brought up the Opel case.

I remember reading, doing that case just being livid. I'm like, why is this middle manager in East Germany setting strategy for the entire Global General Motors organization? I'm like, this is crazy. Joe wasn't saying it's good or bad, he was just saying that's where decisions are made. If you understood this about everyday decisions deepen an organization, then you can actually start to shape strategy.

some people would read Joe and that Opel case and think it's deterministic and that it takes away the agency of the senior leadership, but the fact that decisions are dispersed, information spread across multiple levels, and these decisions iterate over time. They don't take away the power of senior leadership, they should shape how senior leaders create and manage strategy. I remember Clay did another case study.

Where a middle manager, deep inside of gm, a country area manager, is shaping corporate strategy for the whole organization. I was like, as a student when I read that, I'm like, this is crazy. I'd worked in strategy consulting. I thought all decisions are made by the CEO and the consulting firm. And then, you know, you study Joe Bower enough and you see this happens everywhere.

and at first I was frustrated and mad and then I realized, no, means if A CEO is cognizant of that he can shape the context. one of the things Joe says, and we highlight in the book, ex Ante Before Fan, it's impossible to know which decisions are strategic and which ones aren't, and that's what was maddening. And the Opel case, you didn't know when you open up the factory in East Germany that you were changing the very heart of corporate strategy in General Motors.

But if you know this can happen, then you can, two things. One is you can create the context that shapes strategy and two, you know, where and how to intervene. One more example of that from Clay's work was with Intel. I remember we would teach the Intel strategy case on the move out of memory chips into microprocessors. And, you know, Intel Inside came out of that. You know, tens of billions of dollars. And this guy who, Andy Grove, the CEO, probably didn't even know this guy's name, right?

And this guy said, because determine what gets space on the manufacturing floor and what determines that gross margin per wafer square inch. And so Andy Grove never made a decision to get out of Drams and to go into microprocessors, a middle manager deep inside of, Intel in the manufacturing floor. Looked at the data and said, well give more space to microprocessors. They have 60% margins and drams have 20% margins. They moved the entire manufacturing production of a, you know, what was it then?

$60 billion company from Drams to microprocessors without the CEO or the VP of Strategy ever being involved. And the MBA students would say, that's brilliant. Every company should have that rule in how they allocate manufacturing space. And then we'd show 'em the next Intel case. Intel's trying to get low end micro processors, Andy Grove's screaming to everyone, were being disrupted. By the Asian firms and we gotta know how to play in the low end space. he can't get anyone to change behavior.

it's such a brilliant case study because in the, a case the CEO doesn't do anything and the firm moves from memory to microprocessors, billions of dollars of product shifts without a CEO ever making a decision. in the B case, the CEO makes a decision and he can't get the organization the change. 'cause the low end microprocessors had lower gross margin per wafer square inch.

The MBA students thought that was a brilliant rule they should have said no, it's just a rule and it will lead you to one place or it will , keep you from going to another place. and so Joe wasn't deterministic, Aidan. He said, senior management needs to be aware that decisions are happening like that deep in an organization, then they need to lean in deeper in the organization when those come up. Because you can't anticipate all of 'em, you have to manage the context around decision making.

And, you know, I found this with what we did to create BYU pathway at BYU Idaho. BYU pathway today, has over 80,000 students in almost 200 countries. But early on, I couldn't get anyone at BYU Idaho to work on the curriculum because they thought we started with certificates and BYU Idaho is like a certificate that's beneath us. we're focused on bachelor's degrees. I had to realize.

can't create the strategy to make this work inside of the resource allocation process that's in the main organization. So the reason we created, you know, in disruptive technology, you create a separate group, isn't because they're more creative or more innovative. it's the only way to get outside of the existing resource allocation process. And I had to create an organization who said, we love certificate education.

Give me a job skill certificate, that's the highest and best use of my time and talent and I'm gonna work on that all the time. And so it wasn't that I wrote a brilliant strategy for BYU pathway, I created a new context where a different resource allocation process could be built. Who valued the new product, in this case, certificates for first generation and low income students. And 'cos we created that new context, suddenly it could thrive and grow.

So all the work I've done, you did a session a few years ago on dual transformation that Scott Anthony and Mark Johnson and I wrote. All of that was simply an application of Joe Bower's resource allocation theory and said to create the new context for the dual transformation, you needed to be able to allocate resources in different settings with a different resource allocation process.

So it's amazing like all of these scholarly insights and all of this academic insight that's come, still goes back to Joe Power's original observations about how strategy is really made in organizations. And you were so instrumental in influencing me to do this, man, because we spoke about it and , I mentioned this idea, and you go, oh, that would be brilliant idea.

So your little nudge helped me get there. I'm currently still recording a series with Gary Hamel, who, you know, and Yeah. covered all Gary's tome of work and I'm on the last book, but he had a great line that you reminded me of there where you created the right conditions for people to nudge towards the decisions you want to, the resource allocation that you want. He said you can't bottle lightning, but you can build a lightning rod. beautiful.

gravitational pull towards the direction you want people in.

But I, I wanted to lean into a couple of things, Clark and, and things that you would've seen in industry. So when you were working in media transformation in newspapers, I also worked in media at a decade long career there. Some of the decisions made. That was so hard to explain to the organization. So giving access to your content to Google and Facebook to drive your page impressions up. So access to your sites.

One of the biggest challenges I had as the digital guy was digital diamonds versus analog dollars. So that, that, that real paradox. And then the sales guys had so much of the power, it didn't matter about strategy, it was all about sales. 'cause they were given the money despite the iceberg melting and melting, and them actually turning up the heat.

. Well, I love this 'cause I lived it, you know, it was one thing for me to write this, you know, this book where I'm looking at all these theories with Joe Bower. It was another thing when I had to do it in practice and,

But you're right, I used to take a slide Aidan where I'd say, here's the resource allocation process, and inside of this box is the finance department, the product department, and the sales team And they're in the newspaper business and this digital disruption's coming along and look at how their strategy is shaped, by the way each of them allocates resources. So the finance guy saying, like you said, digital dimes compared to analog dollars. And they're like.

We don't have enough customers to stack these dimes up. So I'm not gonna fund the internet because it, it can't work in my model. So, know, the CEO might have said, Hey, the internet's the future, but the finance guy's saying, there's no way I'm giving more resources to the internet team. Right? And then the product team is like, the highest form of journalism is a Pulitzer Prize winning long form piece of journalism.

and people were consuming things so quickly on the internet and sharing things used to say, in the world of the internet, if you aren't the best, you're a click away from someone else. But in a printed newspaper, you kind of were all things to everyone who subscribed to you a digital world, if you weren't the best, they just, wouldn't read my beloved Boston Red Sox in a Salt Lake newspaper.

They'd go to the Boston Globe site or boston.com and for us, we tried to do work on faith and the family and poverty. I'm like, guys, we can be the best in that. But they wanted to just do one more story on every city council meeting. the product team, you would tell them hey, do short roundups that link off to other people's content and then embed our links in other people's. And they were like, no, no, we are the source and everyone will come to our site to read it.

And the internet team knew every story page. So when you and I open up a webpage and read a news story on CNN or New York Times, or the London Times, you know that page I came in, what we called the side door, I didn't go to, you know, the, the times of London and say, I'm gonna start on the homepage and I'm gonna read this for 45 minutes. I came in through a social link in Twitter or Facebook or a Google search. now that I'm on that one page. my new homepage.

And so we had to merchandise content on every story page a totally different way. and the journalists were like, what? What are you doing to my page? You know, why are you putting all this other content? So they, they would prioritize the internet. And then the sales guys, I have a story we tell in the dual transformation book called The Parable of the 11th Floor.

And I had given all of the sales leads to the internet team that, that had no print analog. So if you they didn't buy any print, the print Salesforce would let that go away. And we were growing internet sales like crazy through that channel. But the print newspaper sales team held on. To all of our traditional clients. And one of a big traditional clients of a newspaper for advertising were car dealerships.

we went in and met with the CEO of one of the big billion dollar car companies here in the Intermountain West, in Salt Lake. I was there with the head of print's sales, and I'd been telling him, you guys aren't prioritizing digital. And he is like, oh, we throw it in, you know, but they weren't doing it. And we won the account with the client and I said, now we'll do all the print advertising this way. And who do we talk to about the digital advertising?

And he says, well, we don't do any of that on this floor. It's all done on the 11th floor. And my head of sales for the newspaper and for the TV station, they didn't even know where the 11th floor was. But I can guarantee you autotrader.com knew where the 11th floor was, it was in that moment where I said the sales team just lost digital sales the print sales team. And so, but, But it wasn't the CEO making the decision. It was in the finance team, in the product team, in the sales team.

You know, every day a sales manager saying, do I pull out of my sales bag what I'm familiar with? What gets a high margin? What gets me immediate success? Or do I pull out something that's new and hard to sell? And, and so the salesperson would put, put the digital product le he'd leave it in his bag and he'd pull out the newspaper product and that's what he'd sell every day. Deep in the organization. Everyday decisions were keeping the newspaper industry from ever winning in the internet.

And I had to create a new context for that.

And you know, clay used to tell the story of the CEO of a medical device company yeah. Sono site. And they're trying to sell a disruptive ultrasound device. the CEO is trying to promote the new device and he is on a sales call with the sales rep and the sales rep's trying to sell the big high margin device. 'cause that's, he's used to relationship selling where every device sold for 200 grand.

the sono site device, you know, the portable ultrasound, it, it sold for 10 K and 15 k and you had to sell 'em at much more rapid pace and they were in the sales call. And, And the CEO saying, take out the new disruptive product, and the sales rep won't do it. And the CEO's like, I'm the CEO and I'm telling him to do it. This low level sales rep won't do it. And that's when you realize, oh, Joe Bower was right. Is made deep inside an organization at all levels iterative decisions over time.

And I'll just tell you one more where again, you are, such a good scholar of clay and disruptive innovation, but I hope you're seeing like all of this still goes back to its root insight is Joe Bower's it. allocation why I love Go. you see how the theory built it, and a story Clay used to love to tell was Toyota trying to launch the echo. echo was a low end disruptive car.

Toyota tried to come out with, and Clay tells the story of going to the Toyota dealership for trying to buy a car for his teenage son. and the sales rep, you know, in Cambridge, Massachusetts at the Toyota dealership said, clay says, I wanna see that low end, highly gas efficient car that's only 15 grand. And the sales rep's like, well, that's good, but.

you looked at the Highlander, and the sales rep steering him away saying, oh, the Echo's not a safe vehicle for your son, you don't know if he can drive. and yeah, it gets better gas mileage, but the Highlander in its category gets good gas mile and it's 20,000 more. But, you know, don't you care about your son? And Clay said some sales rep, you know, a hundred thousand miles away from to Toyota headquarters, who the CEO will never know has control of Toyota's strategy.

It's not deterministic that people would, you know, most people don't get this insight, but then if they do get the insight, they say it's deterministic and the CEO is not in charge. Well, the CEO just needs to understand how decisions are made, and he'd say the resource allocation process will not let a sales rep in this far flung location sell the disruptive product. So I've gotta move it where a resource allocation process will value it.

And by the way, Toyota eventually created the Scion, and so the finance people could value it, and the product people could be thrilled to make a cheaper car. a sales channel could be developed that could sell cars that were $15,000, right? And that, that's the insight from Clay and Clay's using it.

Now most people today would see it as a disruptive innovation insight, but the deeper is resource allocation theory and how it shapes strategy. I wanted to share Miles. I shared it with Joe as well. I, made this image using chat, GPT, but where you stand depends on where you sit is the main finding Rufuss miles.

But I think, this is why I want to share this so much that the book was written in an academic sense, but it's so vital to understand from any position in the organization, including if you're the change maker. when I worked in media, I studied you, I studied Desiree News because you guys were having so much success. I wanted to ask that same problem that they had in Socy, the same problem you had with the 11th floor. How did you solve it?

Because how do you get somebody to sell the Echo when they can sell the Highlander and get an extra 10% , on 20 K uplift? I was wondering as well, I don't know if you know, I interviewed Matt Christensen here in Ireland. I was like, going, I don't think he would've fit in in an echo. that's right. Well, you know, Aidan, the answer is don't solve it. you create a new context a new resource allocation process can be built. Because it will never make sense.

you're asking someone to do something defies all logic. not that, you know, clay's big insight is sustaining innovations. It's not innovative versus non-innovative. It's disruptive innovation versus sustaining innovation. it's like, okay, a sustaining innovation will work in this resource allocation system, but a disruptive innovation won't. so, rather than try to solve or rather than try to fix this problem in a system that was designed to solve a different problem.

I'm gonna design a system to solve this new problem. And you know, one of the brilliant insights of clay was the distinct difference between sustaining and disruptive. people had thought all innovation's the same. And we just need to teach people to be creative and innovative and have new ideas. And Clay said, well, you can be creative and innovative and have new ideas. And if they're sustaining, they'll work in the system.

Incumbents are really good at sustaining innovation, or you can be creative and innovative and come up with new ideas that are disruptive. And then no matter what you do, they won't work. I could tell you certificate first education would never work for BYU Idaho. And I had to, rather than trying to convince. Classroom faculty, who are some of the best teachers in the world. That online learning focused on certificates was better.

I just needed to move to a new context where I could create a resource allocation system valued that to begin with. And in the newspaper, I was wasting my time to explain to the finance team or the sales rep or the product team that the internet was going to be the future. actually needed to let them keep maximizing what we had while it created a new context for the future.

They're like, I remember I had an operations professor at Harvard say to me, Clark, you know, you and Clay just wanna go start new things over everywhere, you know? and he is like, you know, we. Just give it to the operations faculty and we can, we can improve it to the point that it's good enough. and I was like, you can improve a sustaining technology in your current resource allocation system. In fact, I trust you. I have total confidence in you.

I had total confidence that I could get the DESE news to do more, what we called high-end journalism around faith, family care for the poor. They were, they were great at that. And I could get them to do that. I could get BYU Idaho to find new teaching approaches to classroom teaching. So it wasn't newness, creativeness, hard work. That wasn't the constraint. The constraint was the decision rule would allow certain kinds of new ideas and not allow other kinds of new ideas.

And that's the role of senior leadership is to recognize that. And then create context that will do that. in the case of disruptive innovation, what makes it even harder is the investment in the new is asynchronously timed the viability of the old. And that's why disruption created the failure of so many industries is you were asking people to do things that didn't make sense. Like I still have the head of sales in our TV station. We're great friends.

Even to this day, he is retired for now, and I am back in education, but he believed to his retirement that I was wrong. Now he was right for TV sales and TV clients. But he couldn't have been more wrong about the future of the internet. when I realized I need to stop convincing him he's wrong, I need to let him be successful in that old world, where resource allocation decisions reinforce what he is doing while I go invest in the new, in a different context.

and that was the birth of dual transformation was, I'm gonna let both evolve in the right times because it might take 30 years till TV's gone. But if I don't start investing in the internet now, I'll never be a player there. And it might take, and education campuses might never go away. So if I wait to prove to the campus faculty that online and certificates or the future, I'll never win that argument. In fact they're still viable today.

BYU Idaho, where I was president, having its largest enrollment growth in its history. Meanwhile, pathways more than two times the size of BYU Idaho, right? So it, and the mistake senior leaders make is I have to change people's logic. And you're like, their logic works within that system. Let it keep working. if they can innovate within that system, let 'em do it. But don't try to get them to do things that don't make any sense in that context.

And the resource allocation, I hunt when I create organizational change, I hunt does the resource allocation system. Reward the behavior and incent the behavior we need here. If it doesn't, I gotta either create something new or it's broken, then I need to fix it. Right? BYU is an R one school. BYU Idaho is a teaching school. BYU pathway is an online certificate, first program. They're all awesome in their own realm of what they do.

And rather than convince any of them that the other one's good or bad, I just reinforce them in their own resource allocation decisions and look what it's done. we now have 150,000 students. We educate and we do it really well at each place. Beautiful. And I'm gonna link to dual transformation 'cause I recorded with Clark before on the idea of A and B. And I use this all the time in my work that you can't, I have two children. I, I can't show either one that I love one more than the other.

So you treat them both with the same love It's like the parent who says privately to the one, you're my favorite child. And then separately to the other one, oh, we love you so much. You are our favorite child. And the truth is, I love all of the universities that are under me, but I love them for what they do, and I don't want them to be each other. Have you got 10 more minutes?

Yes, Okay, so the one, I just don't wanna let this one go, which is in case I don't get to it, because it was really one of the things I learned from Clay's work. But you worked with him on it was, if I am, say for example, the Timken case is almost a part of this, is that you can become captive to a customer, but that can totally redirect your business away and you can miss the gold. So the echo for example, Yeah. the echo example that you gave versus the Highlander.

That the Highlander, the Highlander model appeals to a certain somebody who might be upgrading, but the echo appeals to somebody whose option is nothing else, which is a non-consumer. There's customer captivity, but also non-consumption. Yeah, the, the, and the customer captivity.

And this was theoretically, I mean, clay clay's disruptive innovations theories became popularized and everyone knows it, but the theoretical contribution to the academic literature of clay he connected resource dependency theory that had come outta Stanford to resource allocation theory. This idea that the customer takes over and actually controls the way resources are allocated inside of the organization.

And, when I first read resource dependency theory, I am a believer in human dignity and in personal moral, agency. So when I see things that look deterministic, or be Skinnerian Behavioral, like, you know, Skinner's like, well humans are just like birds and rabbits that we can control and test.

and it used to make me mad when I read resource dependency theory that, you know, that they had looked at institutions and who funded them and that institutions were beholden to the funding sources for their strategy. And I was like, well, yeah, but if I'm a president of a university, I wanna take the university where I wanna go. Clay showed that how a customer outside of the firm. Can capture the resource allocation process and really control the strategy of the firm.

And there's all kinds of implications for this and evolutionary theory and how species evolve. and it's always, the new species evolves in a place where they don't have to compete with the old species. And probably the old species is most fit for that environment. and when the world changes, it usually changes at the boundary. And so new customers show up in the case of customer dependency and they're not attractive to the old model.

usually the winners in a disruptive market win they found a way to serve a different customer. And then that customer grows and then they move up market and start taking the bottom of the old market.

Brilliant. And I mentioned non-consumption as well, which is a. Key concept to understand within the family of the theories. Yeah. look, the industries I've spent so much time in, in news, like I lived in Boston for 10 years and I could never read the news of my beloved BYU Cougar Sports the Boston Globe and the internet came along and I'm, I, up until that point, I'd been a non-consumer of the desert news. And suddenly I could read about BYU athletics every single day.

I'm a daily consumer of the Desert News, so it's a new consumption use case. And, but the Desert News is still covering University of Utah sports and Utah state sports and the Utah Jazz and all, you know, and if you live in Utah, that's great, but suddenly they opened up the diaspora of LDS people all over the world.

And the desert news is reaching people in Africa and in the Philippines and in Boston and they couldn't figure out why 70% of their traffic was around BYU athletics and so little from the other universities because they had suddenly reached a non consuming market. and in academia, students who go to a campus. And pursue their degree.

make up more than half of a population, but the universities can't see all the people who need to be educated, who can't come and there's this huge non consuming market. And, for them to consume the model, just like the internet changed the way I could suddenly consume prior to the internet. I could, I mean, you could mail me a newspaper, but it's too much money and too late and too difficult to get it.

Suddenly the new model changed the consumption behavior and the, when we created online learning with certificates out of BYU Idaho, suddenly people who could never go to college became consumers. Clay had that insight, but he had it because of what he learned from Joe Bower about how resources are allocated. And Joe could have told Clay long before we had the phrase disruptive innovation. the current resource allocation process won't prioritize a consumer who doesn't exist.

And you needed to create new contexts where this could actually work. I think the theory of disruption is one of the hallmark theories in the last 50 years in academic business scholarship. But I think few people realize it sits on the bedrock of resource allocation theory. Absolutely beautiful. I have loads more to ask you, but I'm not gonna. Do that to mind. 'cause you, you put a beautiful little capstone on it. Beautifully, beautifully done.

there's so much more, I just wanna say Clark's work, dual transformation along with his friends that he wrote that book, Scott, Anthony is an absolute gem of a book as well. And that, particularly the idea of framing it, and one of the reasons Clark, I just wanted to so much share this is it.

There's also people in the middle of the organization trying to drive change and they're met by rigidity and they think it's the person, they blame the person. and this, what this work does is it gives you empathy to see miles, laws at play, Yeah. rigidities at play, resource allocation process and, the theories at play. And when you see through the theory, you can almost role play those situations and try and have a bit more empathy to get inside.

And you might just have more success and less frustration. Yeah. And I like what you said, you could have more success. 'cause yes, it will give you more empathy, but it will also tell you, I cannot be successful in this context. I used to tell online managers in newspapers, I'd say, where do you report?

And if you have to go through the vertical functions of the legacy organization, it doesn't matter how smart you are or how hard you work, you cannot be successful in this resource allocation system. so it would also give them the courage to say to their leadership. I need to be set up in a different context.

And, Aidan, I just, I can't tell you how much I appreciate you doing this series. I think it's really important for academic reasons, but also for all of the practitioners who are trying to make good strategy and lead organizations. And you do such a good job of the scholarship, but bringing it to the everyday leader in an organization. And it's always a delight to be with you.

Always a delight to be you with you author of, from Resource Allocation to Strategy, along with the person we're celebrating, Joe Bower, Clark Gilbert. Thank you for joining us. Thank you. Nice one brother. Great to be with you. Thanks once again to our sponsor, our benefactor Kyndryl, who run and reimagine the technology systems that drive advantage for the world's leading businesses.

With a unique blend of AI powered consulting, built on unmatched managed service capability, Kyndryl helps leaders harness the power of technology for smarter decisions, faster innovation, and a lasting competitive edge. You can find  Kyndryl at  Kyndryl dot com.