As part of our Innovation and Investment Academy – which pushes C-level managers and companies to question the status quo – we interviewed Salim Ismail, the renowned serial entrepreneur and master of modern business innovation. The advice of Salim Ismail, Founding Executive Director of Singularity University, Co-founder and Chairman of OpenExO, and lead author of Exponential Organizations, is particularly relevant in Central and Eastern Europe where conservative ways of thinking are often valued for the sake of safety and stability, but increasingly also raise issues for staying competitive.
Innovating has always been an important part of business strategy. What has changed?
There’s been a massive shift in how we think about corporate innovation. Before, you had a lot of time to develop new products and services and bring them to market. But the world is changing so fast now that the very notion of long-term business strategy has evaporated. The only way to navigate is with a broad vision or a moonshot, running little experiments to see if you’re on the right track.
Solar energy, drones and Blockchain have completely transformed today’s society, much as the printing press did in the 15th century. Business value is now being created completely by disruptive innovation. The market is waiting for people like Elon Musk to bring disruptive innovations.
Could you explain the term “moonshot”?
Sure. A moonshot is a ridiculous, insane, unachievable specific vision. John F. Kennedy in the 1960‘s set a goal to land a man on the moon by the end of the decade. It seemed impossible. Nobody had any idea how to do it. The average age of NASA engineers was 25, so they had no experience. Yet they managed to achieve that goal. So a moonshot is a crazy attempt to do something big and new.
Then you want companies to take huge risks on outlandish ideas?
Twenty years ago, doing something crazy was a huge risk, but today the cost of innovation has dropped dramatically. Software that once cost $10-15 million to build now costs $50,000. Everything is moved off the balance sheet into variable cost. For the first time in human history, advanced technologies are cheap. Anybody can innovate at low risks. You run multiple experiments and then double down massively when something succeeds.
A study we did ranked the biggest 100 companies in the US for how agile, flexible, adaptable and scalable they are, then analysed their performance over 7 years. It turns out the top 10 most agile companies staggeringly outperformed the bottom 10. Revenue grew 3 times as fast for the more agile companies, profitability was 6.4 times bigger, return on equity 11 times bigger, and in compound annual growth the most flexible companies outperformed the least 40 times over.
So now we have proof that to deliver shareholder value, you have to be flexible and agile. The world is getting more volatile and the ability to adapt drives market value. Every CEO in the world should be asking: “How can I make my organization more flexible, agile, adaptable, scalable?”
For a big organization, being flexible in a big way is a big challenge, isn’t it?
Yes, the classic corporate world doesn’t know how to deal with disruptive innovation. Organizations are built for predictability and efficiency, which is the opposite of disruptive innovation. And in a big company, it’s very easy for someone to say no. That resistance is a huge problem – like an overactive immune system. It gives startups all the advantage. Big companies must start working like startups.
In 10 years of research, the only way we’ve seen it work is taking crazy ideas to the edge of the company and building off the edge into an adjacent space. Nestle spinning off Nespresso is a good example. They tried to run Nespresso as a business line inside the big company for 3 years and failed. Then the CEO put it in a separate entity and quickly achieved several billions of revenue.
Apple is the master of this technique. They have a great design team and technology supply chain. But I’d argue Apple’s actual innovation is organizational: they form a small disruptive team at the edge of the company, keep it secret from the rest of the company, and tell them to go disrupt another industry. That way there is no limit to the markets they’re in. We’re convinced you have to do disruptive innovation like that, as a moonshot at the edge of the company, and launch new ventures off that edge.
Do companies need a ‘fail budget’ to innovate?
Having a ‘fail budget’ is very important because most of your experiments will fail. And they should. If you’re not failing, you’re not pushing the boundaries enough. That’s well established in venture capital. You fund 10 companies knowing 8 are going to fail, 1 will break even, and 1 will return all the money. The challenge is you have no idea which of the 10 is going to succeed. It doesn’t matter how smart you are – it’s a chaotic environment with lots of luck involved.
The reason Silicon Valley has become what it is, is it treats failure as experience. A friend of mine failed seven times, and the eighth was a successful $8 billion company. Silicon Valley funded him repeatedly. They saw him as a crazy entrepreneur who’d eventually succeed and wanted to be there when he did. That mentality of funding repeated attempts, resilience, is starting to spread around the world. People who can embrace a moonshot type of mindset like this will succeed dramatically.
Is there room for the corporate world to cooperate with startups?
Big companies and startups are two different worlds. If you’re McDonald’s, you aim to deliver the same hamburger in a million locations. If you’re BMW, you focus on highly refined engineering specifications for a high-quality driving experience. That’s the opposite of disruptive innovation, constantly trying things out, moving to a world without drivers.
So, the only approach big companies can take to startups is to buy them and leave them alone. For example, Facebook bought WhatsApp and left it alone for a few years. It was very successful when they did that. The minute Facebook tried to pull it in, it went down. That’s nobody’s fault, just that big companies are designed for specific things and the startup ecosystem doesn’t work like that.
What is your advice for managers who want to do something disruptive?
A manager always has about 5-10% of employees who are super smart, super loyal, but totally crazy and hard to manage. Find those crazy people, put them at the edge of the company, let them pitch the craziest ideas and allocate a little bit of the budget. If they can get to a minimum viable product in a different, adjacent area, give them a little more money. Then build off the edge. Whatever you do, don’t bring it back in, because if it’s disruptive, it won’t fit neatly. Then you can go to the board and say it’s a crazy thing and it’s time to spin it off.
As a small example, Marriot Hotels is worth about $50 billion today. If Marriot had launched Tripadvisor, Booking.com, Airbnb, and so on, they would be worth $250 billion. The irony is all those ideas were inside Marriott, but the company’s immune system would not let them out. Because the lawyer said we can’t take a risk on that kind of accommodation. So, huge companies have a massive amount of innovation locked up inside them, but the structure does not let it out. You have to change the culture, hack the culture, and now we’ve learned how to do that very effectively.
What is your wish for 2022?
As hopefully we are coming out of the pandemic, my wish is that we absolutely do not go back to the old way of working. Which wasn’t working for climate change, income equality, etc. We need to create new models and move forward.