Rethink Innovation for Long-Term Advantage

Ann All

I recently wrapped an interview with John Hagel, co-chairman of Deloitte's (cool name alert) Center for the Edge, in which I asked him about Deloitte's findings that U.S. companies' return-on-assets (ROA) has plummeted 75 percent since 1965 despite big gains in productivity over the past four decades. ROA in the technology sector has been among the worst, despite the highest gains in labor productivity in the United States.

 

Why? In part one of what turned out to be two published parts, Hagel described an intensely competitive environment characterized by lowered technological barriers to entry, a growing number of global competitors and, most of all, smarter customers. He said:

... When we talk about competitive intensity, we tend to focus on who else competes with us. It's a horizontal view of competition. I think increasingly the competitive intensity isn't coming from other competitors, it's coming from customers who are getting a lot more information about options and becoming much more sophisticated in their choices. They have much more freedom to move from one vendor to another. In the tech space, that's been accentuated by the development of standards over time, which facilitate movement.

Indeed, customer savvy factored into two of the top five answers selected by respondents to a McKinsey survey (free registration required), who were asked about competitive disruptions affecting their companies. The No. 1 answer was shifts in customer expectations. Rounding out the top five: changes in cost to deliver current products or services, increased customer bargaining power from increased information about existing product offerings and alternatives.

 

Hagel said both customers and employees benefit from easier access to information, creating a "kind of a pincer with the customer squeezing you from one side and the creative talent squeezing you from the other."

 

To date, most companies have focused on cost reductions and productivity gains. (They did this even before the economy hit the skids, which certainly forced the cost issue.) Yet cost reduction is "a diminishing returns game," said Hagel:

You only have so much cost you can cut, and each incremental cut is harder to find and execute. So our sense is, going beyond cost reduction, you have to start figuring out how you can get your talent to develop faster and drive performance more rapidly. So you're delivering more and more value to the marketplace.

In part two of the interview, Hagel suggested companies will need to shift from product and technology innovation to "institutional innovation," with a focus of providing "scalable learning" for their employees. He said:

The real purpose of the firm is to provide an environment where you can learn faster than you could on your own. That becomes a very different way of thinking about the firm; it redefines roles and relationships. That's where we think the real opportunity is. If you can figure that out, you will drive even more rapid product and process innovation, and you'll also have created a more robust foundation to deal with this competitive pressure.

One of the metrics Deloitte looked at was employees' passion for their work, which it found lacking in the tech industry. Hagel said just 20 percent of the tech work force is passionate about their work. And despite all of the lip service around building relationships with partners and suppliers, Deloitte found most companies also experience problems building meaningful relationships with other companies.

 

In perhaps the biggest takeaways from our talk, Hagel said companies must become more cognizant of "the big picture" instead of focusing so narrowly on short-term performance. They need to develop new metrics that provide more visibility into performance and move beyond financials, which are "lagging indicators" in that they focus on past performance and won't offer much insight into the future.

... We're convinced that to succeed in an uncertain and rapidly changing world, you've got to have a very good idea of who you are and what you are going to accomplish. A whole notion has emerged, and it's especially true in the tech world, that a good strategy is just to sense and respond. But that leads you to spread yourself way too thin. If you are in a reactive mode, you end up not being able to prioritize and it leads to more uncertainty. It hurts that ability to build trust.

Some questions Hagel said companies should ask themselves:

  • Who are the 20 smartest people or companies in our industry or market? With how many of them do we have relationships?
  • How are we measuring talent development?
  • With which relationships have we pushed performance on both sides?


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