Platform companies are all the rage, but for most older companies it is enough to rent or build a substantial platform component to stay in the game. For now, as platforms are merely a wave and what matters most is learning to surf.
While the popularity and proliferation of platforms like Android, iOS, Facebook and Amazon is easy to understand, most fail with an average lifespan of less than 5 years. Social network platforms Google+, Friendster, Myspace, Vice and iTune’s Ping came and went. Others, like Facebook, Amazon, Google and Apple became so successful they are now scrutinized for monopolistic behavior.
More importantly, while platform companies are the fastest growing sector of the S&P 500, both in market capitalization and media attention, most listed companies come from a more traditional background. They often produce a physical asset (e.g. chemicals, cars) or require complex customer-supplier interactions (e.g. building cruise ships) and operate in mature and therefore often heavily regulated markets. All indicators the straightforward platform strategy used by ‘born digital’ platform companies like Twitter, Uber and Dropbox won’t work.
Incumbents have to play another game and turn this seeming weakness into their greatest strength.
Platform strategy for incumbents
John Deere began in 1836 as a farm equipment manufacturer until it launched its MyJohnDeere platform in 2012. By connecting both equipment (e.g. crop harvesters, tractors) and stakeholders (e.g. farmers, dealers, third party software companies, consultants), John Deere enabled farmers to lower their operating cost and increase their yields. The Predix platform from General Electric, the HeatlhSuite platform from Philips and Disney’s Disney Plus streaming platform are other examples of old companies which understood that the ability of platforms to concentrate customers, business partners, data and consequently value could not be ignored.
What they also have in common is the time and talent required to turn the companies’ existing strengths into a complementary platform strategy.
Is time on my side?
Blockbuster bought MovieLink for its movie streaming platform in September 2008, eleven years after Netflix initiated the market disruption. It was too late and a halfhearted approach, two fatal mistakes in a market which suddenly flowed at a much faster rate. Blockbuster filed for bankruptcy protection in 2010.
Before anything else incumbents have to embrace that time flows faster in hybrid and digital markets. Employees of Samsung or other smart phone manufacturers are active in a market shaped by the constant fear of falling behind. They closely follow each other’s moves, always seeking that new differentiating feature that will make the next product launch a success. It is a race that never ends as Microsoft found out after winning the ‘browser wars’ in 2004. After capturing a market share of 95%, the product team responsible for Microsoft’s Internet Explorer lost its edge, allowing Firefox and later on Google Chrome to tip the scales in their favor. However, adopting speed-to-market as a strategic metric is by itself no guarantee for success.
While Google got caught off guard when Apple introduced the iPhone and iOS in 2007, it had enough time and financial resources to catch up and eventually even surpassed Apple in number of smartphones running its operating system. Huawei is in a far more awkward position. It leveraged on Google’s Android platform to quickly gain traction in the smartphone market, but every advantage has its disadvantage. Huawei does not own and thus control the Android platform, Google does. For Huawei, the decision to rent platform capabilities instead of building them suddenly became a liability when it got caught up in the middle of the trade war between China and the United States.
While both Samsung and Huawei sensed the strategic risk associated with renting platform capabilities and tried to mitigate it by investing in Tizen OS and Harmony OS respectively, it is yet to be seen whether customers are willing to board a platform which joined the party ten years late. The decision to build or rent platform capabilities is therefore one of the crucial topics for any incumbent defining its platform strategy.
Do I have the talent?
Platform-related technologies themselves are inert. Revolutionary or not, technology needs a compelling relevance to a customers’ life. Talented people understand that a large marketing budget cannot compensate for a lack of need. They possess the capability to turn the inherent value of technology into realized business value. In contrast to born-digital companies, the team driving the platform transformation at an incumbent faces an important additional challenge: combining the opportunities offered by these technologies and the existing strengths of the company.
Established companies already have a customer base and brand, financial resources, deep market knowledge, committed employees, and an operational backbone. Supplemented by company-specific differentiators, these form the foundation upon which to build the desired complementary portfolio of digital products and platform components. However, the older, larger and wealthier the company, the more likely digitalization initiatives face a mismatch in sense of urgency, cultural fit, governance approach and metrics. Mitigating this risk by organizing these initiatives completely outside the existing corporate structure prevent them from utilizing the available deep market knowledge and operational backbone. Hence, the relative ‘looseness’ between the existing operating model and digitalization initiatives should be a key attention point when defining and implementing the platform strategy.
The right digital-savvy leadership team also recognizes something far more important: platform-thinking will eventually be replaced by something else. No one yet knows when or by what, but noting is impervious to the impact of time. More important than defining a solid platform strategy is therefore creating and nurturing the organizational capability to be successful beyond a single wave.
Learning to surf
Every innovative business model or emerging technology commoditizes and eventually fades into the background after being replaced by something new. Even the decision by John Deere, General Electric and Philips to invest in platform components is merely a step in the right direction. Artificial intelligence and distributed ledgers are pushing the value of first-generation platforms towards the next level, promising personalization-at-scale and improved efficiency throughout the whole value chain. Linking brains directly to devices and platforms may be part of the third platform-related wave. That is, if a yet to emerge technology wielded by talented people does not disrupt the direction we are currently heading.
To be successful beyond a single disruptive wave, every member of the company, from the leadership team to the people manning the front lines, has to embrace a permanent state of ‘divine discontent’. Nokia and BlackBerry failed because their leadership teams missed the transition from selling phones to platform-thinking. It is the same intrinsic motivation to continuously improve and challenge the status quo which determines whether Zara, Apple, another incumbent or a yet to emerge new entrant will dominate the convergence of technology and fashion.
Time is a constant source of small, large and occasionally ‘freak’ waves and the future belongs to those companies that learned to surf.
This blog is based on my recent presentation at the 51th annual meeting of FCI in Ho Chi Minh City. It is a story about the blockchain-siren temptation trap.
Especially in the financial sector, blockchain (wikipedia link) is a big thing. Go to any conference or exhibition and you can’t avoid it. In trade finance, the industry FCI is active in, three large blockchain consortia remain after Batavia closed shop: Marco Polo, We.Trade and Voltron. Voltron and Marco Polo both use the R3/Corda platform and We.Trade the blockchain platform from IBM.
The large players in trade finance have no choice but to invest in what potentially is the next Big Thing. The strategic risk of the ‘do nothing’ scenario is too high and they have financial resources to spare. Some players don’t take any chances and invest in multiple platforms like ING, BNP Paribas and Bangkok Bank participating in Voltron and Marco Polo, and HSBC participating in Voltron and We.Trade.
According to IDC the financial sector invested $552 million in blockchain and the same firm forecasts worldwide investment in blockchain solutions reaching $11.7 billion in 2022.
So what about blockchain and FCI?
Factors Chain International (FCI) is a global association for the open account receivables finance industry, promoting frictionless cross-border factoring: “a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.” (source: Wikipedia). It is a 3 trillion business dominated by Europe (1,7 trillion in 2018), followed by the Asia Pacific region.
FCI has close to 400 members in 90 countries, some of which are very large and wealthy, but most are medium to small. In a mature market like Europe, consolidation has dramatically reduced the number of these so called factors. However, in an upcoming market like China some 9,000 factors are active, but an FCI member from China told me he expects this number to go down to 1,000 in the coming years.
But even these 1,000 will not nearly have the seize and budget of HSBC, ING, BNP Paribas, and Bangkok Bank. For many FCI members, $10,000 is still a lot of money. Their IT budgets are closer to $150.000 – $170,000 than the $15-$17 billion HSBC in planning to invest in new technology. And blockchain and a $10,000 budget don’t have a match yet, if ever.
However, the available budget is not the most important reason whether or not to adopt blockchain technology.
The central question should always be: what is the most effective (doing the right things –> desired results) and efficient (doing things right –> least resources) way to fulfill a business demand? Technology is a resource, like expertise or budget. It is of secondary importance.
At the same time, I understand the difficulty faced by business managers to avoid the siren temptation trap. All the big financial institutions are pouring money into blockchain initiatives, and the vendors promoting blockchain promise the earth, moon and preferably also the sun. And nobody wants to be part of the ‘uncool kids’. It is therefore easy to understand the business managers’ struggle with the question whether to jump on the bandwagon.
The same applies to the vendors, the tech companies which invested millions in these new technologies and seek a return on their investment. I understand that they need to score deals to stay in business.
So what advice do I have for the business managers?
First and foremost, stay focussed on the business objective, opportunity or challenge instead of technology. The latter should always be a means to an end. Secondly, stimulate the IT guys to formulate different solutions, forcing them to be creative and get off the beaten track. One can commute to work by cycle, bus, train or car, each with their pro’s, con’s and budget implications. Thirdly, get your information from multiple sources and dig deeper when something is heralded as the best since sliced bread. Fourth, technologies go through a lifecycle, getting less risky and cheaper with every passing year. Depending on upside of the business opportunity, your risk appetite, access to relevant expertise and the available budget, decide whether and when to invest.
The situation described is of course not unique for blockchain, but common to most emerging technologies and as old as time itself. In the Middle Ages we had alchemists traveling from castle to castle promising kings the ability to ‘transmutate’ lead into gold; after a moderate donation of course. Today we have an endless stream of conferences and exhibitions where todays alchemists promise to turn your $1 into $10. After making a small donation…
The numbers are staggering. Depending on the source, millions or even several hundred million jobs will be destroyed and created in the coming years, requiring governments, companies, employees and parents to rethink their employment-related belief sets. Microsoft, Amazon, IBM, Salesforce.com, Oracle, SAP and Google generated an estimated 76 billion in cloud revenue in 2017. In the same year, e-commerce sales fell between $427 billion and $443 billion for the United States according to the National Retail Federation (NRF) while Statista predicts global e-commerce sales to hit $2.8 trillion in 2018 and $4.5 trillion by 2021.
If riding this technology-enabled transformative wave was as easy as investing in Agile, DevOps, serverless computing or another hyped concept, the failure rate of upstart tech companies would be well below the going rate of 70%. Nor would the retail industry have lost 8,053 physical stores in 2017.
Leveraging on the potential value of emerging technologies is hard.
It starts with embracing the fact that there is only one company asset which is truly scarce: open minded, smart, curious and proactive leaders and employees. Capital is superabundant, as is technology and access to all but the most exotic natural resources. Only people possess the capability to create new business models, value propositions, and attractive product designs. Access to the money required to scale a successful idea is no longer an issue with billions of dollars from investors seeking a return. Warren Buffet alone entered 2018 with $80 billion dollar for acquisitions.
Combine the democratization and consumerization of technology with the ability to automate increasingly complex tasks (e.g. software-defined data center) and the convergence of business and technology; and IT as a separate function is at risk. . Only if the internal IT department is able to convince the business of its added value in pursuing business opportunities in digital and hybrid markets, it will not go the way of the dodo.
In other words, the IT leadership team has to invest in the attitude and skills required to lead in digital markets.
Leading is very different from executing, IT’s traditional sweet spot. The ability to field a development team trained in Agile Scrum is part of the latter, as are containerization and the ability to offer daily deploys in AWS or Azure. They are all part of the HOW, while leaders deal with the WHY and WHAT.
According to Simon Sinek, writer of Start with Why, the essential difference between the “Apples” of the world and the rest is that they start with WHY. The why can cover the core belief set of the company (e.g. original mission statement of Google was: “to organize the world’s information and make it universally accessible and useful”) and/or the need or want of a customer segment (“I am willing to pay a premium for delivery within 12 hours”). The why shapes individual value propositions and even the business model as a whole. It also shapes the WHAT.
What physical product, service or experience is required to address the need or want of the customer? What is an acceptable price point and thus maximum cost level of the solution? What are the functional and non-functional requirements? A traditional IT team would ask the business for a Product Owner and expect her/him to provide all the answers. In contrast, an IT team that adds value asks critical questions about the WHY, has a strong opinion and list of suggestions regarding the WHAT, and presents the HOW in a condensed and business-oriented presentation of five slides instead of fifty techno-speak riddled slides.
The business does no longer needs the internal IT department to develop an app or website, there are thousands of external partners with that capability. The ability to develop and support IT solutions effectively and efficiently is a dissatisfier. Only if IT combines these non-differentiating activities with company-specific technology capabilities that allows the business to make a difference in digital and hybrid markets, the outsource-able faithful servant becomes a cherished business partner.
For established companies, the first step is an IT leadership team able and willing to reframe its believe set. Quoting an article from McKinsey:
“Every industry is built around long-standing, often implicit, beliefs about how to make money. […] These governing beliefs reflect widely shared notions about customer preferences, the role of technology, regulation, cost drivers, and the basis of competition and differentiation. They are often considered inviolable—until someone comes along to violate them.”
Well, the consumerization of IT, automation of increasingly complex operational IT tasks and the Cloud did just that with the monopoly position of the internal IT department.
Up to IT leadership team to either move from DevOps, to NoOps and finally NoIT or redefine their raison d’être, reinvent their IT business model and join the business in their hunt for market success.
Microsoft is becoming an open-source company, sharing 206 packages in February 2017. In 2016, 16,419 contributors affiliated with Microsoft worked on open-source GitHub projects. The company has embraced the view of Jim Zemlin, the Linux Foundation’s executive director: shared development is enabling faster development with higher quality and lower costs. This is causing the software value chain to change.”
It is a 180 degree turn for a company known for aggressively protecting its IP and which head of the security response team argued in 2001 that closed source is more secure because “because nobody’s reviewing open source code for security flaws“.
Why did Microsoft reframe its strategy and what can other technology-driven companies with a traditional business model learn from Microsoft’s radical new view on open source?
Globalization, sustainability, urbanization, digitalization and sharing shape the way we live, work and interact with each other. To thrive, companies have to sense and act on these and other key trends. Sharing, or ‘using instead of owning’, is driven by customers faced by:
- an abundance of choice (read: supply outstrips demand),
- a desire for instant gratification,
- a decline of stable and full-time employment, and consequently
- a decline in purchasing power.
Technology is an important enabler of sharing as its reduces the friction between ‘customers’ and ‘suppliers’. Apps in combination with a scalable backend platform allow for a free flow of information providing the necessary convenience and trust (e.g. via reviews).
Using instead of owning gave rise to a whole new industry, including companies like Uber (car), AirBnB (house), TaskRabbit (labor), Kickstarter (funding), Wallapop (used goods), Udacity (education), Repair Cafe (repair) and Facebook (personal content). Some are mission-driven, but most are profit-driven or at least a hybrid. According to research by PWC, the size of the sharing economy is expected to grow to $335 billion in 2025 from $15 billion in 2014. Hence, sharing does not necessarily means ‘free’.
According to Havas Worldwide, 25-34 year olds are driving the shareconomy, with 51% preferring share over owning. At least as interesting is the observation by JWT intelligence that 40% share to learn new skills or to support good causes. Which brings me to the first reason why it is important for technology-rich companies to look into open source.
Attract and retain Key Personnel
Highly skilled developers and other professionals want to work with peers, using online communities to collaborate and challenge each other. They use sharing to demonstrate their cleverness and use feedback to learn. These developers don’t want to work in a black box, unable to communicate with others due to a classic business model where (I)
“commercial software development is based on the exploitation of the monopoly created by copyright for competitive advantage. It makes sense in that system to avoid any process that would undermine the advantage, such as, for example, the sharing of source code with thousands of potentially competing strangers.”
Why is this relevant you might ask. The demand for highly skilled developers outstrips the supply, shifting the power balance towards the developer. Senior and lead developers can choose from a dozen or more vacancies at any day. In 2016, The App Association estimated there were over 223,000 openings for developers in the United States alone. Quoting a recent report by EY on the market in the UK:
“It’s a particularly salient point given that a recent study by O2 suggests that the UK will need to fill more than 750,000 new digital jobs by 2020 and train almost 2.3 million people to meet the demand for digital skills.”
The automation of increasingly complex knowledge work, the internet of things (IoT), the shift towards the Cloud, advanced robotics and next-generation genomics are some of the trends driving an almost unlimited demand for highly qualified software and data professionals. Quoting Marc Andreessen: “Software is eating the world.” And the end is nowhere in sight.
Many leading companies already adapted their business model and hiring practices, including the aforementioned Microsoft with 16,419 GitHub contributors, Facebook (15,682 contributors), Docker (14,059 contributors), Angular (12,841 contributors) and Google (12,140 contributors).
- Demand for highly skilled developers outstrips supply
- Allowing employees to share positions the company as an attractive employer
Open source as driver of new business models
According to Lerner et al (II), “it will make sense for a commercial company to release proprietary code under an open-source license if the increase in profit in the proprietary complementary segment offsets any profit that would have been made in the primary segment, had it not been converted to open source.” While this statement covers the revenue model of traditional business models, it has at least two shortcomings.
First. by focusing on direct revenue streams, it overlooks the previously mentioned effect of open source on the ability to attract and retain developers, the key driver of profit. No developers, no profit. Closed source or not.
More importantly, the statement does not cover the new generation of platform business models which use open source to:
- quickly boost the size of the ecosystem or platform (e.g. attract developers of apps, games and other source of content that strengthen the customer lock-in)
- establish open standards (e.g. via ISO, IEEE, W3C or OASIS or another organization with a recognized consensus process)
- improve brand awareness (spin-off of the first bullet, creating a positive feedback loop)
- disrupt the competition (e.g. reframe established revenue models within the industry).
Sharing code lowers the entry barrier for developers to build on top of a platform, boosting its overall attractiveness. In 2014, more than 1000 developers contributed to the 107 open source projects initiated by Facebook. By July 2015, Google had released 20 million lines of code and over 900 projects as part of their open source initiative.
Defining open standards is another way to boost a platform business model, like Rackspace and NASA did with their OpenStack project. By being first or at least early in combination with adopting an open source policy, a company can create a community and hence momentum difficult for competitors to catch up with. Quoting Knorr:
“Open source is leading the way in technology development. It’s become the vehicle of choice for startups to gain traction, as customers (mainly developers within companies) take new technologies for a spin, provide feedback, and eventually put them into production. Meanwhile, other developers see what’s hot and start building an ecosystem around a core project, as has occurred with Docker, Hadoop, OpenStack, and others.”
Considering the widespread disruption caused by startups in almost every industry, open instead of closed source should at least be seriously considered. Especially those companies heavily relying on technology.
- Open source and open standards are important enablers of disruptive business models
- Open source allows new business initiatives to scale fast or fail fast
Open source disrupts existing licensing models
Nor Microsoft Office 365 or Google’s G Suite are open source (LibreOffice is), but they provide a clear cut example of changing revenue models within the software industry.
Google’s productivity apps (‘G Suite’) and Microsoft’s Office 365 offer comparable functionalities. Both suites offer email, storage, a word processor, a spreadsheet, a presentation program, and the ability to create webpages to share documents and other types of content. Where Googles offering targets everyday use, focuses Microsoft on doing everything imaginable. Their revenue models reflect this.
Everybody can use Google apps for free due to ad generated revenue. For those power users or companies that want an ad-free environment, support and more storage, a paid premium model is available. In 2015, Google Apps passed 2 million paying companies, demonstrating the viability of the business model and potential to disrupt the de facto monopoly of Microsoft’s Office.
IBM followed a similar path when it was unable to compete with Microsoft in the server space. It adopted open source Linux in order to undercut the license prices of its competitor and regain lost market share. RedHat’s business model is also build on open source. Red Hat shares all its code with the community, relying on value adding support services for its revenue streams.
More generally, business models based on open source software are based on offering:
- value-added services (e.g. consultancy, training, implementation, optimizations)
- software as a service (e.g. including service desk, maintenance, hosting)
- advertising or another cross-subsidy model
- dual licensing model (e.g. commercial companies have to pay)
- freemium (e.g. paid optional proprietary extensions)
WordPress is open source and by far the most popular content management system (CMS) with around 15,886,000 websites in January 2017 (50-60% market share). According to Sketch Themes, WordPress was the most requested skill in the world in 2014, with developers charging an average $50 an hour. By January 2015, Freelancer.com had closed 243,161 WordPress projects at a total value of $60,571,205. That is serious money.
- Disrupt or be disrupted. Traditional business models have an expiry date
- Done right, open source can be a money printing machine
Open source as driver of productivity
Productivity is “a measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs.” Productivity can be increased by reducing the input for a given output (e.g. initiative to consolidate datacenters to better leverage scale) or increase the output for a given input (e.g. use the same team to create higher added value services). Open source can improve the companies’ productivity by:
- providing innovative processes to improve operations (e.g. Facebook reporting a 24 percent decrease in cost and 38 percent increase in energy efficiency after switching to open source hardware designs).
- creating, technology-rich, high value-added value propositions (e.g. The Open Bank Project is an open source API for banks allowing them an secure ecosystem of 3rd party applications and services).
More generally: “It is common for people working for a technology company to suffer, at least a little, from the belief that all the really innovative people in their particular technology happen to work at that company. This can cause such a company to work too hard to produce every last bit of related technology, which is often not the best competitive approach” (III). With Github reporting 19.4 million active repositories written in 316 unique programming languages, smart companies combine externally sourced open source components with their own capabilities to create a distinctive value proposition.
Many companies already found the pot of gold at the end of the rainbow. With Github reporting 331k+ active organization, including 44% of Fortune 50 companies in 2016, these companies understand the value of being part of a distributed network whereby the sum of parts create more than all the individual parts can (e.g. one bee versus the hive as a whole).
Only laggards think they can keep up with the relentless increase in complexity and uncertainty by acting like a clamp.
Notes and references
(I) Andrew M. St. Laurent, Understanding Open Source and Free Software Licensing: Guide to Navigating Licensing Issues in Existing & New Software, 2006.
(II) Josh Lerner, Parag Pathak, Jean Tirole, The Dynamics of Open-Source Contributors, 2006. In: The Roots of Innovation, Vol. 96 No. 2.
(III) Ron Goldman, Richard P. Gabriel, Innovation Happens Elsewhere: Open Source as Business Strategy, 2005.
More on business models used to monetize on sharing can be found here.
More on why and how Microsoft transformed itself from a traditional software vendor struggling to keep up with the competition into a leader here.
When a static analogue business model evolves into a dynamic digital business model, the leadership style has to evolve with it. Similarly, when a native digital startup matures and starts to diversify, the leadership team has to be infused with new skill sets. This last part covers the transition from the current leadership style to one optimized for dominating hybrid and digital markets.
Team members expect a lot from their leaders. They are considered a source of innovation, passion, vision, personal development and trust. Compared with leaders, managers have a fairly easy job as they are expected to focus on maintaining the status quo, improving efficiency, achieving short-term goals and day-to-day control. Nevertheless, a leader is still a human, as pointed out by Maddock and Fulton (I):
“They put their pants on just like the rest of us do. They have both good and bad traits. From time to time, when things are going badly, their old character traits slip through and they become irritable, angry, irrational and capricious. They behave in immature ways. They exhibit traits that amaze us and we say, “I always thought of him/her as a leader! What’s going on?” They disappoint us.”
Disappointment is also all but inevitable when we expect a leader to excel in every situation. Everybody has her/his strengths and weaknesses, a fact often overlooked when a company is faced with the disruption of its market. When the current CEO has a strong track record in brick-and-mortar retail expansion, she/he likely struggles to a) sense and b) act decisive and effective when customers shift towards mobile-first shopping.
Evolving leadership 101
Regardless of the technology-density of the companies’ business model, every manager should strive to become a leader as they are far more valuable to a company. Today’s highly educated employees no longer need somebody to tell them what to do next while several industries are actively substituting employees with either robots or contract workers. Combined with the ability to automate increasingly complex management tasks, the traditional manager is quickly turning into an endangered species.
The most differentiating capability of a leader is the ability to build trust. Trust that you as a leader:
- balance the interests of the company, employees and your personal objectives
- provide clear and inspiring goals and a strategy to achieve them
- empower and coach individual team members to make decisions and learn from them
- involve team members in conversations early in the decision-making process
From personal experience, I know that the third and fourth bullets look good on paper, but are difficult to translate into day-to-day practice. As everybody is blessed with a unique set of strengths and development points, a leader has to determine the willingness and ability of every individual team member to perform a certain task (‘situational leadership‘). There is no single “best” style of leadership.
To improve the ability and consequently self-esteem of junior team members, many leaders launched apprenticeship programs as they focus on solving real life problem, learning from people of different ages, applicable know how and socialization into the company. Investing in coaching and mentoring programs is another powerful way to help team members to grow as a leader or professional.
When discussing the future of long-term team members faced by the imminent transformation of their business processes, leaders focus on the potential of that individual. The pink slip is considered a last resort. Managers react differently. Most are unable to look beyond the current tasks and responsibilities, using the pink slips an easy way out.
More importantly: true leaders prevent the company from ending up with its back against the wall in the first place.
Evolving from analogue to digital
As late as 2012, CIO.com reported that:
“There’s a dangerous lack of confidence in the board’s digital literacy, revealed in our exclusive survey of 250 IT leaders. Sixty-four percent say the board “doesn’t do its homework” about technology matters and 57 percent say directors rely heavily on what they read in the press to evaluate IT strategy. Some 40 percent say board members “don’t really care about IT.”
Due to the ongoing shakeout in many industries, boards had no choice but change their tactics, hiring 30- and 40- somethings to help them make sense of digitalization. These technology-savvy high-potentials are able to translate technology into business value by linking a new technology to an emerging market need. They are individuals who understand that no technology can transform a market without a solid business model (II).
Besides these IQ-related skills, leaders score high on Emotional Quotient (EQ) and get out of their functional silos as digitalization requires an end-to-end approach. In other words,
“a leadership model that is less autocratic but more of an authoritative and networking nature.” (III)
Last but not least, effective leadership starts with self-reflection and understanding one’s personal strengths and weaknesses. Shorter product and technology life cycles, culturally and geographically dispersed virtual teams and less predictable customer demand are only some of the forces at work today. Only leaders who sense the impact of these and other forces and adjust their long-established intuitions will be able to emerge on the winning side.
This blog only activates the left side of the brain, the IQ part. From an intellectual perspective, it is fairly easy to identify the traits that make a good leader. However, managing and especially leading is truly a profession in a sense that it requires the mastery of a complex set of soft and hard skills through practical experience, mentoring and being blessed with talent.
Reading books, articles, blogs or even formal education cannot create effective managers, let alone leaders. Teal expressed it as follows in his article The Human Side of Management:
“And still the troublesome fact is that mediocre management is the norm. This is not because some people are born without the management gene or because the wrong people get promoted or because the system can be manipulated—although all these things happen all the time. The overwhelmingly most common explanation is much simpler: capable management is so extraordinarily difficult that few people look good no matter how hard they try. Most of those lackluster managers we all complain about are doing their best to manage well.”
Hence, leading in the digital is first and foremost about identifying, attracting, nurturing and retaining those unicorns that score high on both IQ and EQ. They in turn can identify, attract, nurture and retain the rest of the winning team.
Notes and references
(I) Maddock, R., Fulton, R., Motivation, Emotions, and Leadership, 1998.
(II) In their article The Transformative Business Model, Kavadias, Ladas and Loch argue that new technologies alone cannot transform an industry. Nicholas Carr made a similar observation in his famous article IT Doesn’t Matter in 2003: the ubiquity of information technology prevents it from being a source of sustainable advantage. In time, every new technology commoditizes or is replaced by a more capable substitute.
Leaders are considered a source of innovation, passion, vision, personal development and trust. Leaders enable the other team members to turn technology into a source of value.
Compared to more traditional markets and business models, the digital age favors leaders who score high on emotional intelligence and the ability to translate uncertainty into opportunity.
You can find the first part of this blog on leadership here.
The most valuable trait of leaders is their ability to remove the natural tendency of people to resist change. Resistance occurs when people feel they have lost control, and/or pride, feel insecure about their competency, are confronted with excessive uncertainty, surprises, or new routines (I). However, it is exactly what happens when an analogue business model has to reinvent itself. Leading a team faced by this challenge requires somebody with both a high intelligence quotient (IQ) and emotional intelligence (EQ). The IQ is used to formulate a tantalizing vision and strategy to get there, while people with a high EQ score high on self-awareness, self-regulation, motivation, empathy, and social skill (II).
Traditionally, IT is considered a suitable career path for students with large brains, so the importance of EQ may at first sight seem overrated. But consider the following trends:
- more emphasis on user experience and habit-forming technologies
- convergence of business and IT domains
- automation of increasingly complex standard tasks, and
- the emphasis of the business on innovation and speed-to-market.
These trends can only be dealt with effectively by business-savvy, assertive, highly skilled, adaptable and creative people. It is the type of employees every company wants and they know it. To lure and retain them, the company needs to inspire and support them in their self-actualization and personal development. Hence, employees who expect a leader who cores high on IQ and EQ. Quoting Angela Ahrendts, senior vice president at Apple,
‘Everyone talks about building a relationship with your customer. I think you build one with your employees first.’
Leadership in a digital world
Before a leader can channel the right inspiration and knowledge to the right person at the right moment, she or he first has to define the future direction and key objectives. Hale mentions two key skills to point the team in the right direction (III):
- Focus on results. This aspect includes clearly stating the goals and strategy; what the ground rules are to achieve them; what is open for discussion and what is not; the translation of team goals into personal objectives; and defining how benefits and success are measured.
- Consistency of focus. The communication message of the leader has to be consistent and she or he has to ‘walk the talk’. Too much change leads to distraction, confusion, and frustration while people change their behavior based on observable acts by their leaders. The visible rules have to match the invisible ones.
At the same time, market realities demand a certain level of flexibility. Technology, customer demand and competitor behavior are in a constant flux, affecting both the present and future market position. Microsoft struggled for years to reinvent itself when mobile and consumeration disrupted its traditional business model. With the appointment of Satya Nadella as CEO, defending existing market spaces was replaced by a strategy based on the ‘cloud-first mobile-first’ principle. While Microsoft’s new direction seems to hit the right mark, CEO’s of Yahoo, Acer, BlackBerry, AMD and HTC are still struggling to revitalize their business models, demonstrating the difficulty of such an undertaking.
Besides focus on results and consistency, digitalization also requires a renaissance of charismatic leadership, reversing its decline due to the “routinization of charisma”. The larger and older the company, the more likely
“ charismatic authority is succeeded by a bureaucracy controlled by a rationally established authority or by a combination of traditional and bureaucratic authority” (IV).
Hybrid and digital markets are too dynamic and complex for finely grained and strictly enforced governance and control frameworks. Providing the team with the future direction and key objectives of the company is not the same as dictating their day-to-day activities. It is not the CxO, but the frontline team and their (informal) leader that understand what the customer wants and where the market and competitors are heading.
In their article Is Your Leadership Style Right for the Digital Age?, Libert, Wind and Beck Fenley make a similar observation. Today’s highly educated employees want to take ownership and expect their manager to focus on results instead monitoring whether they clock in at 9. The authors argue that digitalization requires an open and agile organization, instead of an operating model whereby
“all insight and direction comes from the top. In short, the autocratic Commander, whether brilliant or misguided, just won’t cut it anymore.”
That said, how to infuse more ‘digital leadership’ into an company shaped by decades of ‘analogue leadership’? As mentioned in this blog, there is still a lot of value in the Mature and Decline part of the business product lifecycle and subsequently the accompanying underpinning IT solutions. Firing and hiring the whole leadership team is therefore not the answer. Addressing this challenge is the topic of the third part of this blog.
Notes and references
(I) Kanter, R. M., Ten Reasons People Resist Change, Harvard Business Review, September 2012.
(II) Goleman, D., Emotional intelligence, why it can matter more than IQ, 1995.
(III) Hale, J., Performance-Based Management: What Every Manager Should Do to Get Results, 2004
(IV) Kendall, D., Sociology in our times, 1997
The article How to be a leader in the digital age published by the World Economic Forum covers the impact of digitalization on the society as a whole, citing the following key structural challenges: “(1) rapid and far-reaching technological changes, (2) globalization leading to the dynamic spread of information; (3) a shift from physical attributes toward knowledge and (4) more dispersed, less hierarchical organizational forms of organization.”
The article The Frontline Advantage by Fred Hassan describes the importance of frontline managers, both to motivate and guide the team members and as a feedback loop to the executive leadership team.
Leaders are considered a source of innovation, passion, vision, personal development and trust. They enable the other team members to turn technology into a source of value.
The topic leadership is part of the first principle: less defensive, more defensive.
Technology is abundant, easy to copy and therefore unsuitable as a source of sustainable competitive advantage. It requires creativity, intelligence, perseverance and all those other traits only humans possess to turn technology into a differentiating hybrid or digital value proposition. Brain Solis, principal analyst at Altimeter Group made a similar observation (I):
“We already found that companies that lead digital transformation from a more human center actually bring people together in the organization faster and with greater results.”
Transformation is equal to change and only leaders can effectively influence the behavior of the people surrounding them. Managers and bureaucracy cannot.
This statement is as relevant for the business as it is for IT. Throughout the whole value chain, progressively complex manual tasks are automated, driving down cost and improving agility. What remains are high added-value activities like:
- objective and strategic settings
- spotting and pursuing (un)foreseen opportunities
- spotting and pursuing (un)foreseen risks
- research and development
- business development, marketing, and
- customer service
They are activities that business and IT perform in isolation when the company pursues slow moving analogue markets. In fast-moving hybrid and digital markets, the business and IT teams have no choice but to converge or even fuse their human Key Resources (II). Only together they can effectively transform analogue value propositions, channels, customer relations, and business processes.
One only has to look at Silicon Valley to see the impact of people as a key driver of company value. According to AnnaLee Saxenian, professor at the University of California, Berkeley, the success of Silicon Valley is firmly based on people, culture and connections. In her book Regional Advantage: Culture and Competition in Silicon Valley and Route 128, she explains why other regions aspire but were never able to replicate its success. In Silicon Valley job-hopping, peer-networking and sharing were the norm, fostering innovation and consequently value creation.
In Silicon Valley, companies have to compete and collaborate at the same time. They understand that only as part of an porous interdependent network they can turn complexity and uncertainty into a sustainable business model. Individual persons or companies cannot.
Notes and references
(I) Kapko, M., Enterprise Collaboration Will Drive Digital Transformation, CIO.com, July 2014.
(II) ‘Key Resources’ is one of the building blocks of the Business Model Canvas from Alex Osterwalder. Covered in the book, it provides the foundation for the IT Business Model, a canvas optimized for IT teams that want to converge their operating model with the business more effectively.
(III) Mastenbroek, W., Verandermanagement, Holland Business Publications, 1997. (Dutch language)
Background information and further reading
In literature, people as a key source of corporate success is part of the ‘resource-based view‘ on strategic planning. From a resource-based view, it is a company-specific combination of resources (e.g. skill sets, technology, intellectual property) that allows the company to differentiate itself from the competition. These differentiating combinations of resources are the ‘core competencies’ of the company and should be retained and nurtured.
The article What is the Difference Between Management and Leadership? describes the important difference between leaders and managers. Both are linked and complementary, but not the same thing.