Gary Hamel - Leading the Revolution Part 1

our guest Lays out an innovative action plan for any company or individual intent on becoming and staying an industry revolutionary for years to come by drawing on the success of gray-haired revolutionaries like Charles Schwab, Virgin and GE capital companies that are always thinking ahead of the game and growing in new directions and profiling individuals like Ken Kutaragi, one of the pioneers of Sony PlayStation, our guest, explains how companies can continue

to grow, innovate, and achieve success even in a chaotic world market with insights called from years of experience.

And there's been more since this book he Explores where revolutionary new business concepts come from.

He identifies the key criteria for building companies. Are activist, friendly, and revolutionary ready.

He shows how to avoid becoming one vision wonders.

He demonstrates how to harness the imagination of every employee and explains how to develop new financial measures that focus on creating new wealth packed with practical advice.

This book is an accessible read perfect for both businesses and individuals that don't want to get caught in the slow lane in the race for success in the 21st century.

It is a pleasure to welcome back one of the world's most preeminent business thinkers who has helped set the management agenda for half a century. Today. We share his book from a quarter of a century ago in 2000, which spent time on the New York Times bestseller list, the Wall Street Journal, USA Today and Business Week, all those bestseller lists.

Author of Leading the Revolution, how to Thrive in turbulent Times by Making Innovation a Way of life. Gary Hamel, welcome back to the show. Thanks, Aiden. It's a pleasure to be back and talking to you today. And I want to let everybody know, Gary, that it's six months now that we've been recording this me navigating your travel.

Gary travels extensively all over the world working as a consultant, giving keynotes, and I want people to understand that we will repeat stuff because we've recorded this over lots of, lots of times. We'll mention the same examples again, but I also want our audience to read along with us. And I'll have highlighted this in our newsletter today, we're gonna focus on chapter one and chapter two of Leading the Revolution.

And I want to recognize , that you dedicate this book importantly to your dad, professor Paul Hamel. And I thought we'd give him the honor of mentioning him and the profound influence he had on your life, Gary. Yeah. Thank you. Thank you so much. Yes. He he passed away a couple of years ago at 102 and was alive intellectually till the very end of his life, and inspired me to learn and to follow an academic career.

So I owe him a debt that of course will be impossible to repay, but thank you for that kind mention. The apple doesn't fall far from the tree, indeed, you, you called one of your children after him as well. That's exactly right. Paul Hamel, rest in peace, . I thought we'd start off with a bit of context

to give people an understanding of the corporate temperature at the time of this writing in, in 2000. It was the wake of the.com fizzle, various accounting scandals, had emerged. We talked about Enron and stuff like that at the time. So I thought maybe you'd give us a little bit of context about that business environment because as Mark Twain said, , history doesn't repeat, but it often rhymes.

And we're seeing a lot of the stuff that we saw back when you wrote this book, reemerging in a different way.

Yeah, I think clearly what was happening in the mid nineties, late nineties was you had a wave of new technologies. Mobile phones were becoming commonplace. The internet was becoming ubiquitous. E-commerce was taking off. There was a huge tsunami of venture capital going into these new businesses and and a fair amount of irrational exuberance. And hence we had the collapse of the.com bubble. All of those technologies continued to work their way through the ecosystem.

And many companies that were started at that time, like Amazon have gone on to be world leaders. But a lot of them got washed out along the way.

But I think , what was clearly interesting was that that technology allowed us to dramatically rethink how we reached customers how we marketed and how we built audiences and so on. And as, as is always the case, there were some companies that were ahead of the curve that saw the potential. Just like today with AI and robotics and so on, and synthetic biology, there's some companies ahead of curve. Curve and some behind. But then as now, the incumbents were mostly behind.

And that was always kind of struck me as odd because.

These existing companies, industry leaders, they have the resources, they have markets, they have technology, and yet so often they seem to surrender the future to faster moving and in fact less well-funded upstarts. So the book was really acknowledging that , the chess table was being turned upside down. And you have a choice in that environment. You either innovate, you either reinvent who you are, or you go under. I think , with a fair amount of hyperbole.

I remember writing that somewhere in the garage, somebody is crafting a bullet with your name on it. And the question is how do you dodge that? How do you shoot first? So that was the context at the time, and I would argue in the decade since we've continued to see wave after wave of innovation, new technologies, making new things possible. But I'm not sure on average. That large established companies have gotten any better at intercepting the future. Sad to say

one of the things you draw an analogy between was the idea of the E world. So back then it was the whole e as in the internet, but also electricity. And I thought that was interesting that many, many companies electrified their processes back in the days of electricity. many companies then digitized their business models expecting it to lead to new growth, but in fact, what it did was reduce costs and they replaced analog dollars with digital dimes.

It's interesting if, if you look at, and, and perhaps we'll talk about this in another chat Aidan, but.

If you look at the amount of money we've been spending over the last 30 or 40 years on digital technology, that thing has just gone up and up and up. , the last data that I looked at said that we're spending right now around three and a half trillion dollars a year on digital technology. Now, most companies are using that in fairly incremental ways for incremental improvement. Now , you have to invest in that, right?

The consultants will come and tell you're gonna get left behind, and , that's true. So you really have no choice whether you invest in those technologies or not. But you do have this choice of whether you invest earlier or later, whether you're ahead of the curve or behind it, and whether you use those technologies in incremental ways or whether you use them in transformational ways.

So here we are years after Amazon was created and yet Walmart is still struggling to catch Amazon and e-commerce, and I don't think they'll ever catch them. And so it, it wasn't that am that, , that, sorry. Walmart is still struggling to catch Amazon. And it wasn't that Walmart wasn't investing in digital technology. They were one of the first to really re-engineer the supply chain, use digital technology to manage a global supply chain.

But they really just missed the opportunity to invest in e-commerce. So this pattern just repeats itself again and again. And I think on a, , in a very practical way, if you're a CEO or CTO or CIO, one of the most important things you can do is look at your investment in technology of all sorts, and ask yourself how much of that money is going into things that will create new to the industry advantage versus merely trying to catch up.

Because so often the spending is it's kind of just like, zero sum warfare. Your competitors invest to be a little faster, a little better. You match that investment back and forth. And of course the consultants because they're specialized by industry, by banking, by transportation, so on, they'll often just want you to do what all your competitors are doing. So you really have to be very intentional of thinking through how do we avoid this to becoming an arms race?

And where are we investing and using technology in a way that is truly unique to our industry and will create advantage.

you say to meet the twin challenges of revolution and renewal, you and your colleagues in the business are going to have to throw out many of the industrial age beliefs you're carrying around in your heads right now. And I'd love you to riff on a few of these examples. Pick whichever ones really resonate with you. They still exist. This is the big problem. And really why I wanted to share your work because you've been doing this for.

Decades and people miss it because when they're in the midst of it, it's different to read about it than actually have to do something about it. You say, for example, a senior executive set the corporate direction resources get allocated from the top core business will always be core business. . Predictability is better than serendipity. Radical equals risky. Experience is more valuable than curiosity.

Entrepreneurship is something that happens on the fringes of the organization, and alignment is better than dissension. When I read about that, I was struck by how few organizations have thrown out what you call these organizational orthodoxies that clearly don't work, and I'd love you to pick a few of those maybe and explain , , what was happening then, but also what you've seen persist and maybe some companies that have broken these orthodoxies.

So. To be clear, that list you just went through, , I was arguing that's dangerous thinking, right? To believe that innovation just happens on the fringe or that strategy comes from the top or that the core business will always be the core business that never need to be fundamentally reinvented.

So I think, the most dangerous thing in any organization is the unchallenged assumptions and beliefs , of senior leaders. And often, people in the middle are lower down in the organization. They're quite reluctant to challenge those beliefs. They've learned. There's very little profit in arguing fundamental points with the senior leadership team. So one of the things I think is super important is for leaders to seek out the internal dissidents.

Let, let me give you kind of an old example, but I can give you contemporary ones as well.

There was a smart technologist at at and t and you might remember, although it's a while ago the old telephone network was built with all the intelligence and big central switches. So giant computers that did managed the volume of calls. And if you wanted to create a new feature, like call waiting or something like that, you had to reprogram this central switch. And if you got it wrong you brought down a telephone system. Well, this is the time the internet is starting to emerge.

And, and this, this technology wrote a paper inside of at t called The Stupid Network. And that was a very provocative thing to say in a TT 'cause they were talking about the smart network, right? Where you had all this intelligence at the center. But, but what you could see happening was the intelligence was all gonna move to the periphery. The intelligence would be in our devices, in the servers, and so on. And the network itself would be like dumb pipes.

So he wrote that piece very, very prescient and was forced to take it off of his website and kind of disown it and ultimately left at and t because the idea of a network that was simply dumb pipes where the intelligence that was just like too hard for them to get their heads around. And you see this again and again. I might have mentioned, young Eric Yuan, this is just a few years ago, he was a immigrant to Silicon Valley from China.

He had, was a passionate about video conferencing had gone to work for Cisco, who had a product called WebEx, which some of us might remember. And which I think now has maybe three or 4% market share. And year after year he encouraged his managers, his boss. Like, let's get into a more consumer friendly video conferencing business. Let's do something in the cloud that everybody could use. They said, no, no, no, we're a B2B company not interested. The kid leaves and he creates zoom.

Which now has about 60% market share. So yeah, this, this repeats itself again and again. So as a leader, you wanna look for the people who have different points of view. You wanna in every meeting you wanna say, is there something I'm missing? Right? Is there some old belief I'm hanging onto that I shouldn't, is there some assumption I'm making that might not be more valid? Is there something you are seeing that I'm not seeing?

And you have to be, particularly as a more senior leader, you have to be very explicit and intentional about that because people are very reluctant typically to speak up. Companies miss the future not because they lack the resources, nor typically because the future was unpredictable. They missed the future because it was unpalatable. It was just like, that makes me uncomfortable. Or because they were simply asleep at the switch.

They were not out there where change was happening, deeply immersed in it, understanding it. So yeah, that for me is the most dangerous thing for any organization. And as a leader, you need to be seriously humble about what you believe. Always open to disconfirmation, looking for disconfirming evidence, amplifying the uncomfortable signals rather than trying to damp them down. It's either that or you surrender the future to somebody who's less orthodox than you are.

One of the problems , and really why I love sharing this work and the breadth of your work and how far it's gone back is you've seen these patterns time and time again. Like, one of the examples you give is the mall in America. And you had JC Penney on one end. You had Sears at the other end, B Dalton and KB Toys for those people who remember those companies, but then they were replaced by.

At the time when you wrote this 2000 Toys-R-Us, the Home , Depot and Staples, and Walmart, displaced Sears, and then all these companies got in trouble themselves. So the cycle keeps continuing. And what I really think is important is when you're in it, you don't see it as much because you have vested interest. Maybe you're close to retirement, all these different things that make your decision making flawed really get in the way.

Yeah. And I think there's just a natural human assumption to believe that what is forever will be. That's simply not the case.

I wrote a, a piece some long years ago for fortune and I argued it's unlikely that Amazon will be the last chapter in the history of retailing. Like, I don't think like God is gonna stop the clock on retailing evolution with Amazon. So they may reinvent themselves, or it's hard to imagine what might come next. They're so dominant, but you have to be willing to try and you see things around the periphery.

These see businesses like Shopify, which are going to many businesses helping them set up their e-commerce and handling all the logistics, the backend, the payments, and so on. And allowing small businesses to compete with Amazon scale, at least to some extent. So, yeah, that's. That's a mindset that you just have to take super seriously, is that what we have is not permanent. It's not forever. We live in a world of creative destruction.

Either we are going to reinvent ourselves or somebody else will do it despite us. But when you have so much at stake in the existing system, very hard to challenge that Orthodox , I look at right now at education. With tuition, certainly private universities in the United States and UK and so on, tuition is going up and up. You find that most, like two thirds of university graduates end up not even working in the field where they got the degree.

A university degree has now kind of just become a commodity. The education is becoming unaffordable. A lot of programs are not preparing people for today's workplace. And yet these universities just seldom ask themselves deep questions about what are we teaching people? , how do we use technology? What's the value of what we're doing? How do we take a a, an enormous amount of cost out of the system is kind of let's just perpetuate what we have.

So that's the, the benefit is when you've seen this pattern over and over again.

You start to be, super humble about what you know, and just constantly on the lookout for what might change this? What about some companies that you really thought would make it, and they just totally bombed. Or they had, they played all the right moves, but just didn't, whether it was that they had the wrong strategy or they didn't execute right. Or as you talk about in the book a lot, they acquired their way to growth or they didn't do an Enron on it, basically.

So they weren't illegal in any way, or not creative accounting. But, I'd love you to share maybe one company that you were like going, man, I thought these guys were rock stars and then this happened. Well, certainly, again, watching this pattern and watching companies ebb and flow and so on. I. You become very reluctant to declare that like anybody has figured it all out because most, most haven't.

I, I would say writing back when I was writing that I did expect Sony probably to have done better than it has. It certainly leads in some areas in, in, in the photographic business, which is kind of a dying business in a sense. Cameras they just do extraordinary products. They are still absolute world leaders in miniaturization, but they were also slow to the digital revolution and slow to adopt new technologies.

Made some big acquisitions that probably weren't very smart, like columnbia Pictures and have seated a lot of ground to LG and Samsung. So that was a highly entrepreneurial company. I remember I'll tell a funny little anecdote. I, I was one time at the World Economic Forum and they put me up in a really lousy hotel. And with a very hard single little bed in it. And I was a little I have to say, pissed off and like, Hey, I've come all this way. I'm talking and you guys put me.

And so I walked down to get a taxi or a car to go over to the main venue. And checking out of the same time as me as Akia Morita, the founder of Sony. So I thought, okay, if he could deal with a hard band, I better shut up. But again, you see that same pattern of a brilliant inventor, huge vision creates the Walkman and the PlayStation and all these amazing products.

But at some point like so many organizations and in fact this happens without any alarm bells or anything off, but at some point you believe you have more to lose than to gain from challenging the status quo. And you shift from kind of playing offense to playing defense. Let's not screw it up. Let's make sure we get the next generation right. And so on. I assume that happened at Sony, but they were just also slow into digital and therefore created an opportunity for others.

So that's, I mean, it's still a great company, but it's one that I might have expected to have hung on to its leadership and flat screen d displays perhaps have a much bigger presence in the PC thing. I think at one point they had mobile phones. I assume that's gone, or maybe it's just in Japan. So yeah, that would definitely be an example. And some of those orthodoxies you talked about there, like the strategy comes from on high.

The senior executives don't mix with the rest of the organization.

One of the stories I heard about Sony, and you were probably there, their HQ in New York was that the senior executives and the CEO had a separate lift so they wouldn't mix with the common folk. And as a result, you don't have those kind of water cooler moments. You're not finding out what's happening on the floor. You're not seeing what salespeople are seeing out there in the real world. I hope that some of that has changed.

, I certainly think the dedicated lifts in the private dining rooms , are probably mostly gone. But even when you have more interaction again, unless you go out of your way , as a leaders, a CEO to invite descent and ask people and question them, you'll still live in a bubble. Right.

People are not going to kind of challenge and I've seen this again and again, , even recently, I, I shouldn't name the company, but a company that all of your listeners would know a very famous company sit, sitting in a meeting I'd watch a young team like work hard, prepare a presentation quite provocative, and come in and then just immediately wilt when they get like the first objection. And kind of, oh yeah, well maybe that's not right. And so on.

And it wasn't that they lacked the data, but I. They just didn't have the courage to fight their corner. And to be fair, the people on the other side, the senior executives they were more interested in showing off and scoring points than they were in learning something from this young team. It's, it's a lesson I learned a long, long time ago when I was working with a large, large IT consulting company. Again, every, everybody know the company.

And, and I saw a similar dynamic , at play where a couple of people, they've been doing some really amazing work. A young team, a couple of people come in to present to the executive committee. These guys are sitting around some big impressive table and here's some like kid up there and they, it was just like a crucifixion. And it wasn't like necessarily ill intent, but this is just as a leader this is what you do.

You pick other people's arguments apart and often you're more interested in challenging their first assumption than you are just like sitting back and shutting up and like learning something. So I remember in that particular case the next time we did that, 'cause we had a bunch of steady teams looking at the future and coming and presenting to the senior group. The next time we did that, we took the senior group out of the corporate offices because that's their castle.

We rented some kind of shabby premises somewhere. We had them sitting on folding chairs and then we made sure that the team coming to present outnumbered the executive team and so you just mixed up the power dynamics there and you couldn't feel quite so cocky , and important. And then we said, and you can't ask anything for the first 30 minutes, just listen. So, yeah, that's, there's little things you can do like that will help to even it out.

But the people who see the future in most organizations, the most clearly are out of the periphery. They're closest to customer's technology. They may be a long ways from head office, and you have to make sure that those people have a significant share of voice in any discussion about the future and strategy. And typically they don't. So there's things you can do to change that. But, if, if you don't, you'll just shut those people down and pretty soon they learn like why bother?

Why speak up? I hope you put them up in the same hotel. They put you up in the World Economic Forum, the crappy bed. Gary, maybe you'd chair, I know Haier is a company you work very closely with and one we admire very much on the innovation show. We talk about it as a hero of innovation in many ways, but the idea of getting outta the building is very much at the heart of a company like that. And if there are anything you can share, please do

we could go into a very deep kind of case study on them, and I think maybe we'll save that until kind of we're talking about maybe my, some of my more recent books. But I will tell you fundamentally I think the most important thing they've done. They challenged this deep management belief that large companies are there to exploit their scale and their size. And that young companies are the ones that invent the future.

So I don't remember which great management thinker and I'll get it wrong if I, so forgive me for not remembering, but there's a simple little framework, that we use sometimes where there's two dimensions. One is exploit. So exploit the advantages you have. And one is explore. Like go out, find the future and invent it. And I think many, and rightfully so many management theorists and thinkers have said these are mutually exclusive, right?

Like, you either are big and you're trying to do the same things over and over again and eke out the small efficiency gains and scale up or you're nimble and you're out there looking for the future and trying new things. And clearly what happens as young companies grow up is they move from being , in that explored territory to being exploit.

So again, you look at companies like Google and Facebook and so on, they've had some great innovation, but over time the energy of everybody is more about running what we have then building something new. And so we just took that for granted that it's impossible for a company to be good at both. You can't be this like bastion of penny pinching efficiency and also break the rules innovation and Haier. So like, why not?

And part of that came as Zhang Rumin told me years later, they read another book I wrote called The Future Management, which I argued yeah, very few companies have done this, but there's no reason it should be impossible, right? We should be able to walk and chew gum at the same time in very large companies. Like, why can't these things coexist?

That was really the goal is how do we build a company that is an entrepreneurial platform where you can have small teams, very entrepreneurial, even inside existing businesses? Because again, I think the mistake a lot of companies make is to think, , the core business is just the core. It's forever gonna be the way it is. And then we'll innovate over here and find, try to find the next big thing. Well, the core has to be reinvented fundamentally over time as well.

Or it becomes more abundant, irrelevant, and so higher realize we need as much entrepreneurial energy in the core business. Inventing new brands, higher value added brands bringing intelligence into our appliances leveraging smart manufacturing learning how to get much better at bringing in customer insights into our development process with more traditional products. So they said, , we have to be as entrepreneurial inside the core business as we are anywhere else.

And so when you hear through the years Zhang Rumin, they're iconic CEO now I guess Chairman Emeritus that was always the goal. We're gonna do both. We're gonna exploit scale where it adds value, and we're gonna do that in some very unique ways, perhaps we talk about later. It's not that they don't have sizable scale and they can exploit scale and building brands and manufacturing and r and d and so on.

But we're also gonna build an organization where everybody has a local p and l. They all feel accountable for results. They all have the scope and freedom to innovate. And it's just a killer combination when you could put those two things together, now they could screw up in some way. I can't yet anticipate, but I think that's really been their, their signal contribution to how we think about management. These are not mutually exclusive.

You can have all of that entrepreneurial energy and in fact they're open to entrepreneurs from outside. If you have an idea, if you look at something Haiers doing, you look, they are a world leader in internet of things. You look at their platform, Cosmo Plat and say, gee, we could use that in the clothing industry. We could use that in medicine, and we can use your tech. You can come to Haier, you put a proposal to them, they'll help you create that business.

And so the fact of the matter is most new business plans. Written by employees working for somebody else who are frustrated and they leave and then they go start the new business. Like why not make it easy for people to do that inside? And that's what Haier has done That idea of breaking the rules.

Gary, you authored a Gallup survey and this was, you talked about in the book where you asked 500 CEOs who took best advantage of change in your industry over the past 10 years, newcomers, traditional competitors or your own company. And the number one answer almost unanimously was newcomers. And everybody said they claimed that they were executing better. You were really trying to differentiate this, is it execution?

Because everybody says the problem is execution or we don't have the right people. But what you find is it was always changing the rules. Yes. That bravery, like Haier had to change the rules is the real challenge. think that's true. And , it continues you look at payments chime you look at in defense a new company called an Anduril, A-N-D-U-R-I-L, which has recognized that in future military conflict, numbers are gonna be more important than mass.

So they're working on how do you use creatively drones and other technologies. Obviously we all know what SpaceX has done Databricks and so on, and so it's not like anything has changed here. In almost every industry you look at. If you look at, market value of the whole industry, and then you go back over the last 5, 10, 20 years, you'll find that most of the new market value, enterprise value was created by new competitors rather , than by the incumbents.

And that, again, that kind of mystified me. Like, why should it be that way? And in fact, where where I've lived for most of my professional life in Silicon Valley, we we just expect this to happen. We expect the incumbents to screw up, to miss the future, to be slow. And usually that's that's a good bet. So again the technology is out there for everybody to use. It's not like this technology, you can Haier the scientists, you can it's not that it's typically so esoteric and difficult.

You can form partnerships with these young companies. You can buy them. So it's not really about the technology, but it is about that ability to think differently about the future. And again, I think often when people look at technology, they fail to kind of strip it back and ask the question, what's the new functionality here? What are the core of this? Does it allow us to do? Right?

AI allows us to contextualize and to organize knowledge in a very, very specific way to fit whatever particular problem or context you have. And so you sit, okay, if that's the kind of this core, like where do we, where would we deploy that across our business? How do we use that in a truly revolutionary way? So yeah, , the patterns haven't changed. It is still by and large young companies who are creating most of the new wealth.

But I'm encouraged because here and there, as with Haier and a few others, I see companies that are beginning to say, it doesn't have to be this way.

There's some risk aspects here. So if you've created a successful company or you've come in as a new CEO, there's an expectation on you both to. Defend the past or grow it and create something new. And you say, without doubt, innovation can be risky. Think of Motorola as multi-billion dollar bet on Iridium, which actually went bust. But innovation risk is determined by four things, and I'd love you to maybe extrapolate some of these.

First was the size of the irreversible and nonrecoverable financial commitment that must be made to get a project off the ground. These are all the killers. Second, the degree to which the new opportunity departs from the company's existing base of technical and market. Understanding we talked about the capabilities or the competencies before. Third, the amount of irreducible uncertainty surrounding critical project assumptions. And fourth, the timeframe required for the ramp up.

The longer the timescale, the higher the risk. Those things absolutely destroy creativity inside companies because taken on these things, like those poor kids that went in front of the senior executives, you get crucified for these type of things when it'll be profitable. And those kind of questions kill the idea before it's even born. , and so those are important criteria to be very aware of when you're looking at a new opportunity.

I would say though, there's often an assumption that that risk and, being radical means being risky. That these things are the same thing. That if an idea is radical to parts the norm, it is also risky. And I just that is sometimes true, right? , when Boeing were developing the 7, 8, 7 and they set out for the first time to develop a fuselage out of composites rather than aluminum. That's a pretty risky thing, right? If you get that wrong, it's super expensive.

You're betting the future of a very important program on the fact that you can master that technology. There's no way to do it kind of halfheartedly. And in that case it did take them a long time to get it right, and it was super, super expensive. So there are some things like that. Now you can argue even there, there's a way of testing that at smaller scale and making sure the technology is ready before you do that.

So there are things like that you know, , where the bets come in very large chunks, and maybe it's hard to do it, but in a lot of cases that's that's not the case. I think Nestle now has a really big business with these coffee capsules, right? An espresso. I don't, I can't remember, the last time I looked, it was more than 4 billion Swiss francs. It's probably double that now. You go like, well, how do you reinvent coffee for heaven's sakes? Like this has been around forever.

And you reinvent it by making it much easier to have a good cup of coffee. And if I remember the innovation behind that started decades ago and just step by step, little bit by little bit, they were started to explore, well, what can you put in these capsules? Can you get whatever you need? And so many bars of pressure through the coffee maker, can you get something good out the other end? So if you'd looked at the investment in that business. As a share of Nestle's revenues. It was trivial.

It was like some third decimal point. And so often what's important in innovation is persistence. And just keep at it. Keep experimenting, manage the risks. Make sure that your investment doesn't get ahead of your learning. Don't like go big and bold as if you've already figured out all these things, if you haven't. And so I think as often companies don't intercept the future, don't create the new businesses, not because the risks were so big.

And and that it really was like completely rolling a dye, but you just didn't stick with it long enough. Right. And you weren't creative enough in de-risking it, right?

So for example, at Haier, almost every new product that they develop now, they start by putting prototypes up online and asking hundreds of thousands of followers. Does this make sense to you? Does this look attractive? What do you think about , the features, the price and so on, and getting a huge amount of early feedback. Well, like, why wouldn't you do that? Rather than getting a long ways down the development cycle and find that you've kind of missed something.

So I think , as much energy as goes into coming up with new and innovative ideas, you have to put an equal amount of energy into thinking about how do you de-risk that? How do we use partners? How do we get early customer feedback? How do we do prototyping at very low cost? Because often big companies lose a lot of money because they can. And what I've often seen is you get it's kind of the opposite problem of completely missing the future.

You get executives that get really excited about something and you pour a ton of money into it and you mistake money for commitment. And in fact, it's it's a common problem. If you ask people in, in most organizations. How would you know if your leadership team was really committed to this idea, to this new business, or whatever it might be? And almost always the answer would be, well, like , it's money.

And people, we'd have a lot of investment behind you go like, no, no, no, no, no, no. That's a really bad measure of commitment.

At some point that might be important, but at the beginning, what you want is intellectual commitment. We believe there's an opportunity here. We believe this is going to be important. We're gonna take it super seriously. We're gonna put a few of our best people on it, and a little bit of money. But you measure it by commitment and perseverance, not by how much money you're spending because the risk is when you're doing something truly new, it's very easy to get it wrong as well.

And there's there's plenty of examples of that. Cisco wasted a ton of money trying to create a video conferencing solution for the home. I think it was called you and me, I'll have to go back and look, but like hundreds of millions of dollars. At the same time it was clear we were gonna just be able to video conference off of our PCs and so on. This is a proprietary thing where you had to have Cisco equipment on both ends and pay a monthly subscription.

Like if you would've just thought about it deeply. Now, the idea that like, let's allow people to do this was a good idea, but the approach was like wrong and it was ba based on faulty assumptions, which maybe you would've found out earlier if you would've taken a little more care and gone slower and done better testing. So you have to be careful and not assume that radical equals risky. 'cause if you do, you'll never try anything that's truly new.

Alex Osterwalder was on the show before he, he talked about the Nespresso idea that it was a business model, it was a different business model for Nestle.

And I wondered about that. What were your. Observations of that. So a company has become successful and has a business model that works or has a formula that works in the exploit language. They are exploiting this very, very well. Somebody, maybe it's slow students again, or those new hires that come forward and go, we've got this new idea. It's a new business model. Introducing that , can cause a whiplash inside an organization sometimes.

And I wondered a, any good examples of that you've seen in your work? Well, I think. I've always been a bit. So yes, it was a new business model. And in fact, I think in, in, in the book we're talking about today leading the revolution, I think that was really the first kind of mainstream, this, it was long before business model canvas and so on, but we, I think I called it , a business concept innovation. Maybe it was the language I used, I can't remember.

But clearly , that's what these newcomers are doing. It's not just a new product, it's an entirely new business, a new way of going to market, a new value proposition, often built on new competencies, capabilities, and so on. And so, the innovation's not around a particular product, it's around the whole business model or, or today in, in indeed the whole ecosystem.

But I think, a lot of people have argued, well, the reason innovation's really, really difficult for large companies is because it's gonna cannibalize what they already have. And to some extent that is true, but in most cases, the new thing turns out to be way bigger and way more valuable than the old thing. That's a that's the only way it becomes big and it's a success. It's better than what was being done before. And it may have it may have lower margins but the volume may be a multiple.

So I think we talked about before, we can come back to this in another conversation. You look at Intel passing on the opportunity to do small chips for mobile devices for Apple and others. And you could argue, well the margins on that are probably gonna be lower than selling microprocessors to Dell and HP , and so on. And yeah. But , look at the volume. Look at , the billions of these chips that are produced every year. So I think it's often that's not a good excuse.

Right. And so, I have to say, I almost kind of disagree with the premise of the innovator's dilemma that if we do this new thing, it's gonna just cannibalize. It's such a difficult challenge and we have to walk away from everything we've done. That's just generally, that's not true. The new thing starts small, it doesn't cannibalize right away. You have plenty of time to adjust and adapt. Now once in a while you get something like digital cameras, yes. That just pretty much decimate fail.

But lemme give you another example. One of the first cases I taught , as a young professor , many years ago was a case on Canon versus Xerox. So at the time Xerox copiers were sold mostly to big companies. They could do thousands of pages an hour, and so on. And and you might remember, you might not, where in some sub-basement in your university or company, you have this photocopying department with these big machines.

Well, cannon said, you know what, why should people have to walk down four flights of stairs or whatever? Like, let's just give people a small little copy or little printer, like right in their office and at the beginning. That's very easy to ignore by, from Xerox Xerox had a completely different pricing model based on pages that you used. Canon just sold the device and sold some toner along with it. And it was pretty trivial for a very, very long time.

And Xerox would've had plenty of time to think about that and get into that. Now, it was much lower margin required, different distribution, but these were not like insuperable problems to solve. So it was, it was far more just laziness or dismissal, a dismissive attitude that it wasn't that this suddenly eroded the core of Xerox's business and if they would've committed to it you have a profit crisis, it just simply wasn't the case. And it isn't the case generally.

So, it's simply that that thing was unfamiliar and and, and challenged some orthodoxies about how you price and who your customer is and so on. So I think that, sometimes large companies use that excuse or others use that excuse. Well, it's so difficult because you know it's gonna destroy the business you already have not right away. And often it turns out to be a bigger, more profitable thing than what you already had. And that, that, that proved to be in that case as well.

I'd love to share a graph that you have in the book. Remember Gary wrote this in 2000, and think about the adjectives. You described that process in this, for those people, just listen to us. column A is procedural, reductionist, extrapolate, elitist and easy. And B is creative, expansive, inventive, inclusive, and demanding. And Gary asked you to think about that in your organization, which adjectives describe the planning process.

And even though we know that this does not work, we still persist with column A. And I'd love you to tell us a little bit about this. Garry.

I wrote a paper and I, and I think it was probably an HB article. It was probably a little bit before that book came out leading the revolution, but it was called Strategies Revolution. And the argument behind it was maybe two things really. One is that the most important thing about any strategy is how it's different from every other strategy.

If a strategy is just a pale limitation of, what your competitors are doing, or it is based on just kind of common insights across your industry, that's not really a strategy, right? If there's no chance of that strategy yielding above average performance if the strategy is kind of not very different, not very differentiated. And I think the second point in that piece is that if you wanna create a breakout strategy, you probably need to engage new people in the process.

You can't have the folks who've been running the legacy business for the last 10 years who are emotionally vested in that and so on. They're not the ones that are gonna come up with the ideas for the new thing. And so I argue that what we typically call strategic planning is actually an oxymoron. Planning and strategizing are two completely separate activities. Strategy is really about imagining new possibilities, generating new options that should be very kind of divergent and exploratory.

And planning is about laying out the milestones and the resources and programming that into existence. And we conflate those things. So we talk about strategic planning and obviously in most cases what you find is 95% of the effort is on the planning side and like maybe 5% goes into something that's truly imaginative and expansionary. And that's why in one recent survey I saw only 11% of executives thought their strategic planning process created value. And there was a PWC study.

And I'll, I'm gonna get this kind of somewhat wrong, but I'll get it direction correct. I think in that study, a survey, I think of 6,000 executives barely, only a third, said they've had a strategy that they felt was differentiated. I think only 18% said they had a roadmap for building future capabilities. So, most companies are still stuck with that very linear reductionist, financially driven planning process.

And yet the chances of outperforming your peers, the chances of intercepting the future are absolutely dependent on a process that generates dozens, if not hundreds or thousands of new strategic options. And then you can start to sift through them, which makes sense, which will create value. But the planning process typically is very linear. There's very little divergence at the front end.

There's not a development of a rich array of new, interesting ideas, which, by the way, Aiden one, one of the reasons. Companies so often are kind of incremental and stick with what they know is they, there's nothing in front of them that looks better. I think there's this old expression, the bird in the hand versus the bird in the bush. So the bird in the bush, your existing business, like the feathers may be coming off and it's kind of halfway dead, but damnit, this is my bird, right?

I love it, I know it, and so on. And if you don't see that bush with all this bright plumage and all these new opportunities, right? You have to have, you have to believe that the future, the new is gonna be more valuable, more exciting than what you're hanging onto at the moment. To get there, you have to have a strategy process that generates a lot of new and compelling alternatives. And that means a very different sort of process than what we call planning.

It means teaching people how to think like innovators involving hundreds of people across the organization and generating options using peer review to find the best options rather than like letting you know the old guard decide what they wanna do or not. So, and we can get into this, what I call open strategy, but, the planning process is deeply broken and we need to , make a very clear distinction between budgeting and planning. Creating a strategy that's fit for the future.

That idea of the bird, I just see this horrible bird. Hey, what do you think? My pet bird bird? And you're like, yeah, it's lovely. You mentioned a Dakota saying from the Dakota tribe, which is if your, if your horse is dead, dismount the horse or dismount a dying horse. But I, I wanted to segue to strategy decay, which is chapter two, and something that , you called out then.

So you said between 1995 and 2000, the NASDAQ Composite Index rocketed from 7 5 5 to 4,000 7, 696, and the Dow Jones Industrial average climbed from less than 4,000 to nearly 11,500. There were many who claimed that the long stock market rally was proof that the business cycle had been suspended and that a new age of unprecedented productivity growth had dawned.

And when I read that, I was thinking, well, we're seeing something similar at the moment, but back in oh eight and oh nine, when we had the financial crash, many businesses, were backed and they were bailed out. And then during the pandemic in 2019 to 2022, say, other businesses, smaller businesses as well, were backed and bailed out. And there I share that because it masked a lack of innovation.

It was people who lost the muscle, the innovation muscle that got them to that position in the first place. And I thought that we're seeing a little bit of that again because of the market being so strong that it's masking perhaps a lack of creativity or innovation in many, many companies, particularly in the us big, big companies.

No, I, I think that's true, Aidan, and again, we might go deeper in that in the future conversation, but let me throw out a little bit of data now. 'cause we've just, I've just really been thinking about this. And we can start with US companies, but it's not, they're just maybe more extreme example, but you kind of see this across Europe and so on. So if you think from about the last 60 years, and we're gonna divide that into last 30 and then the previous 30.

So we, whatever we have, like early 1990s until now, and then early nineties, back to the sixties. So if you took that first 30 year time period from the early sixties to early nineties, corporate profits in the United States grew at about two and a half percent per year, like real growth, compounded growth. If you take this more recent 30 year period that has been closer to 5%.

You go like, what the heck happened that this long-term trend of slow profit growth, and I'm talking about like the s and p 500, suddenly that curve goes like this. And, and by the way, that has because co salaries are tied to share price and so on, and shares reflect profitability expectations that has just dramatically increased. CEO salaries, we unpack what that happened as some economists have done, and you find that.

The majority of that increase in profitability is re accounted for by three things, none of which have anything to do with leadership, innovation and so on. Number one is that we've had historically low interest rates. So law borrowing costs have been down and we had effective interest rates close to zero for a long period of time. That's changing. So that was one. Number two in the US we had a big cut in corporate tax rates.

The effective tax rate for the largest companies was basically cut in half. It sounds like Trump is, is going to, to, to, to, to cut those again. And then, and then thirdly, you had growing consolidation across all of these industries and banking, automobiles, telecommunications, airlines, growing consolidation, which gave these companies more market power, more pricing power, and therefore bigger margins. And those three things explain.

More than a hundred percent of the increase in profitability. In fact, if you take those things away, the profit growth over the last 30 years would've been slightly less than it was during the previous three decades. And so, yeah, I mean, there's some things that I would argue are probably not sustainable, that are running out of steam. Borrowing costs are not gonna go lower. We may bring corporate tax rates down, but like that's a one time thing.

We're getting, I think, less willing to see big competitors merge. Competition authorities I think are gonna be, become a little bit more active, perhaps, maybe not, but in any way, that wave of consolidation you can't consolidate forever. So I think yeah, I think we've had an illusion of vitality on the part of these companies, which is really, that it's an illusion.

When you look at the data in the US you find that over half of the largest companies in the United States over the last 20 years, have grown more slowly than GDP growth. Like really, you're a big company with all these resources and smart people, and you can't even grow as fast as GDP. That's like, that's pretty pathetic. So, yeah, I think, I think there is endemic mediocrity that has been disguised by exogenous external factors that have Boyd profits up.

But, I, I don't know that, I don't know anybody who would tell you that the next 30 years are gonna be easier than the last. And in fact, Goldman Sachs came out with a report, predicting that share price will be up by about 3% a year. Over the next decade, whereas over the past decade, it's averaged about 10% per year. So yeah, I think, I think we are going to find out which businesses maybe can still innovate and which can't.

But as you were suggesting after all of these good years, I think there may be a lot of businesses, and I can name some of them that have lost a lot of that innovation muscle. I think of Procter and Gamble, I think it's been more than 20 years since they internally created a new billion dollar brand. I and we don't want it to happen. buffet said , it's only when the tide goes out, do you see who's swimming naked?

And there's a lot of people bluffing, a lot of people, and they don't, I don't think, they don't even know that they're lacking innovation muscle that they're gonna need, that this change muscle has atrophied. And as a result, if you're, if you are a change maker and you're good, you don't get a job in this company or you're ousted because when will this be profitable?

And this is a segue to the next important point that you make, is that in so many companies back then that you studied, there was unsustainable cost cutting going on where they were trying to get more and more blood from the stone.

And another study that , you did research that indicated that if a company's earning growth exceeds its revenue growth by more than five to one for more than three years in a row, there's an 80% chance that it will face a major earning shortfall sometime in the next three years. But simply, I love this one. There is a limit to liposuction. Yeah, I think maybe today I would I think I then, I call it corporate anorexia. Maybe today I would call it like corporate ozempic or something.

It's the same thing. If you look over the last 10, 20 years, what you've seen is a whole lot of not necessarily wrong cost cutting strategies, but things that simply don't build a stronger business. You've seen huge shift to contract labor. 90% chance when you call your bank or an airline or whatever, you're not talking to one of their employees. You're talking to a contractor somewhere often on the other side of the world.

You've seen obviously a huge amount of wage arbitrage with, about 40% of the world's manufacturing shifting to China. And and we've used wherever we can technology to replace human beings and so on. So yeah, we're. I think the other term I had for this, which is perhaps more evocative, is denominator management. So if you think of the numerator is, revenue and the denominator is costs of, of people in capital and so on. It's obviously easier to cut the denominator than to grow the numerator.

And so I think you have lot of leaders in companies who are essentially denominator leaders and they know how to do wage arbitrage and cut costs and get rid of people and so on. You saw, I mean, a classic contemporary example is looking at what Boeing did, right? You, you, you spin off fuselage manufacturing to a kind of startup that you fund and, and, and so on. Arguably a very critical part of making an airplane.

You find out that, and you replace a lot of long-term, deeply experienced, but expensive employees with relative newcomers who have no experience making airlines and you're gonna have a problem. And they did have a problem with doors coming off aircraft and so on. And so yeah, this is still an issue where you are willing to trade away core skills, real expertise, experienced people for relatively short term cost gains.

And I say that recognizing that there is no place anymore for inefficiency to hide. You do have to have world-class efficiency, but there are ways of getting that that can make you stronger and healthier. And there are ways of getting that, that hollow out the business and are not sustainable , and create risk. And, but again, it takes. Entirely different set of skills to imagine new businesses, to have the courage to invest in them to persevere when times are difficult.

And this is just not a skillset that you find in many senior leaders.

In fact, one of the things I've argued Aidan make this vital point, turn it back to you. But, in, in most organizations the way you get the top job, or one of the primary ways you get the top job is to run the biggest legacy business, the core business, and don't screw it up. So you run it for five or six or seven years and you get, maybe make it a little better, and then you get the co job. I would argue that nobody should become CO in a substantial company unless they built a new business.

Or truly transformed a business. And I don't mean just turning around a struggling one. I mean like re vectored something, new customers, new segments and so on. Because I want leaders who know how to build things and grow things, and not simply leaders who are good at financial engineering and cost cutting. And so if I'm a board, that's what I would be asking.

I say like, I don't let's look at your slate of candidates, either internal, external, and say who here has actually built something new, something from the ground up, and has some sense of what it takes to do that? I read, I might have mentioned this in one of our other conversations, I read a book about Elon Musk building Tesla. And you can love or hate Elon Musk. It's kind of beside the point.

But I would encourage every manager, every leader, every CEO to read that book it was written by, I believe a Wall Street Journal reporter. We can maybe find the name and put it in the link. You get some sense of what it takes to do something new. The energy, the commitment, the relentlessness, the courage, the daring and and obviously Elon Musk or Steve Jobs, I mean, these people are once a century, once a lifetime kind of talents.

Having said that, there are a lot of people who built new businesses and it does take a different set of skills and a different mindset than running the status quo. And it is all too rare in society's most important institutions.

On that positive note, it's a probably a good place to leave it. For those people who are reading along with us, we're just kind of coming to the end of chapter two. So we're gonna pick up from chapter two the next day. So if you are reading along with us, do join us and pick up from there. Gary, for people who want to find you, find out more about your work, book you for keynotes, if they can fit you in into your schedule, where's the best place to find you? Gary Hamel.com.

You can also find me on LinkedIn. Happy to connect there. And on x Twitter I'm Prof, PROF Hamel. So always happy to have a conversation if people have questions. Wanna share an experience, love to hear from them. Brilliant. And you're always sharing great stuff on LinkedIn as well. But I'll link to all those places to find you author of Leading the Revolution. Gary Hamel, thank you for joining us. Thank you, Aiden.