The Power of Trans­for­ma­tive Goals

Em­brac­ing a trans­for­ma­tive goal is one way to move a le­gacy busi­ness from the brink of dis­rup­tion to a new busi­ness model.

Rotman Management Magazine - - FRONT PAGE - By Anita M. Mc­ga­han

the term ‘moon­shot’ has emerged IN THE FIELD OF MAN­AGE­MENT, to de­scribe a break­through goal on a five-to ten-year hori­zon into the fu­ture. The idea is that a moon­shot rep­re­sents a goal so com­pelling that it mo­ti­vates vir­tu­ally all stake­hold­ers to strive to­ward its achieve­ment — de­spite the dif­fi­culty and com­plex­ity of the path to suc­cess.

In Sil­i­con Val­ley, the term is re­served for only the most im­por­tant in­no­va­tions: The mi­cro­pro­ces­sor was a moon­shot, as was the first per­sonal com­puter (the Ap­ple II), the World Wide Web and Ap­ple’s iphone. Google has fa­mously in­vested more than $800 mil­lion in moon­shots like au­ton­o­mous ve­hi­cles, cre­at­ing tens of bil­lions of dol­lars of mar­ket value for the com­pany.

The ques­tion is: Can an es­tab­lished or­ga­ni­za­tion that has been suc­cess­ful in a le­gacy busi­ness adopt this ap­proach? De­spite many stud­ies show­ing the value of set­ting long-term goals on the model of a moon­shot — in­clud­ing fas­ci­nat­ing books by for­mer Pepsi and Ap­ple CEO John Scul­ley, and Lisa Gold­man and coau­thors — rel­a­tively lit­tle has been writ­ten about a process for de­vel­op­ing a break­through goal at this level.

In this ar­ti­cle, I will of­fer some in­sights on a process for de­vel­op­ing a moon­shot for an or­ga­ni­za­tion that seeks to ad­dress in­dus­try dis­rup­tion by de­vel­op­ing a fun­da­men­tally new busi­ness model.

A His­tor­i­cal Con­cept

Moon­shots get their name from U.S. Pres­i­dent John F. Kennedy’s 1962 speech an­nounc­ing that his coun­try would seek to put a man on the moon and re­turn him safely to the earth — and that this goal would be ac­com­plished by the end of the decade.

A num­ber of man­age­ment strate­gists have an­a­lyzed this speech, which is widely her­alded as among the most com­pelling in his­tory, to iden­tify what made it so mem­o­rable, im­por­tant and uni­fy­ing. Their con­clu­sion: What made the Moon­shot am­bi­tion stand out was its sim­plic­ity, clar­ity, sig­nif­i­cance and tech­ni­cal fea­si­bil­ity.

Speak­ing at Rice Univer­sity in Hous­ton in Septem­ber 1962, Pres­i­dent Kennedy sold the moon­shot idea on ar­gu­ments that harkened back to the very foun­da­tions of the U.S. as a ‘fron­tier

state.’ The stakes, he ar­gued, re­flected the most es­sen­tial and im­por­tant pur­pose of gov­ern­ment, which he framed as ‘as­sur­ing peace in space.’ Kennedy aligned the as­pi­ra­tion to put a man on the moon with a prin­ci­ple es­poused by the pi­o­neers that gave life to the U.S. cen­turies ear­lier: Har­ness­ing tech­nol­ogy in the in­ter­ests of free­dom.

The Moon­shot speech was also backed by a de­tailed eval­u­a­tion of the chances of suc­cess. The Pres­i­dent’s ad­vi­sors had de­ter­mined that, while the pre­cise route to putting a man on the moon within a few years was un­known, the tech­nol­ogy ex­isted to make it hap­pen. The stakes for Kennedy were com­pet­i­tive: Dur­ing the Cold War, the com­pe­ti­tion be­tween the U.S. and the USSR would oc­cur on tech­no­log­i­cal terms that viewed space as a new fron­tier.

Mem­bers of gov­ern­ment sit­ting with Kennedy in the hot sta­dium at Rice Univer­sity that day were well aware that the Pres­i­dent sought to mo­ti­vate a large spend­ing pro­gram that would re­quire Con­gres­sional ap­proval. And yet even small chil­dren lis­ten­ing to the speech could clearly un­der­stand the power of the achieve­ment, should it oc­cur: A man on the moon!

It is these char­ac­ter­is­tics of the Kennedy moon­shot speech that strate­gists use to craft a moon­shot: The goal must be es­sen­tial to con­ti­nu­ity of pur­pose; mo­ti­vated by am­bi­tion and com­pe­ti­tion; in­spired and vi­sion­ary. A moon­shot for a suc­cess­ful es­tab­lished com­pany can be route to re­newed lead­er­ship un­der rad­i­cally new tech­no­log­i­cal and cul­tural con­di­tions.

The Roots of Dis­rup­tion

The idea of dis­rup­tion orig­i­nated with the­o­ret­i­cal con­cepts put for­ward by econ­o­mist Joseph Schum­peter in the 1930s, 40s and 50s, which were de­vel­oped by scholars of tech­no­log­i­cal change in the 1960s, 70s and 80s. These ideas were rooted in Schum­peter’s ob­ser­va­tion that, in many in­dus­tries, when tech­no­log­i­cal ad­vances cre­ated the po­ten­tial for busi­ness-model in­no­va­tion, pi­o­neer­ing firms that had achieved lead­er­ship in their in­dus­try were of­ten un­able to adapt.

The idea of dis­rup­tion ad­vanced con­sid­er­ably in 1997, with the pub­li­ca­tion of Har­vard Busi­ness School Pro­fes­sor Clay­ton Chris­tensen’s The In­no­va­tor’s Dilemma. The key idea in that book — which had its roots in prior work by Prof. Chris­tensen with Joseph Bower and Richard Rosen­blum — is that the lead­ing cus­tomers of large or­ga­ni­za­tions of­ten dis­cour­age large com­pa­nies from adapt­ing tech­no­log­i­cally. These com­pa­nies fo­cus on cre­at­ing the most value for their key cus­tomers, and as a re­sult, nei­ther large com­pa­nies nor their cus­tomers have an in­ter­est in dis­rupt­ing a sys­tem that is work­ing for them. By con­trast, dis­en­fran­chised cus­tomers — who are not ben­e­fit­ting from the es­tab­lished sys­tem — have the great­est in­ter­est in break­through in­no­va­tion.

These ideas are of­ten ex­pressed through the S-curve, such as the one in Fig­ure One. The ver­ti­cal axis rep­re­sents value cre­ation in an es­tab­lished in­dus­try such as main­frame com­put­ing, land­line tele­phones, re­tail video rental, tra­di­tional pho­to­graphic film, pa­per news­pa­pers, de­fined-ben­e­fit pen­sion man­age­ment — or any other busi­ness that is (or was) es­tab­lished and gen­er­at­ing rev­enue.

Dif­fer­ent scholars model value cre­ation in this model dif­fer­ently. I find the most use­ful def­i­ni­tion to be the one of­fered by Adam Bran­den­burger and Har­borne Stu­art, who de­scribe value cre­ation as ‘the dif­fer­ence be­tween to­tal cus­tomer will­ing­ness-to-pay and to­tal sup­plier op­por­tu­nity costs.’ The key in­sight here is that value cre­ation re­flects the trans­la­tion by the in­dus­try of in­puts into valu­able out­puts. The hor­i­zon­tal axis rep­re­sents time or, in some mod­els, the cu­mu­la­tive in­vest­ment in re­search and devel­op­ment in an in­dus­try.

My own 2004 book, How In­dus­tries Evolve, de­scribes the tech­ni­cal el­e­ments of this def­i­ni­tion in fur­ther de­tail. The S-curve shape shows that in­dus­tries gen­er­ally be­gin in an en­tre­pre­neur­ial phase, in which value cre­ation re­mains rel­a­tively low for a pe­riod of time. Once a break­away firm emerges, the value cre­ated by the in­dus­try may rise rel­a­tively quickly, es­pe­cially as the in­dus­try evolves to serve a mass mar­ket. Ma­tu­rity oc­curs when the pace of new value cre­ation hits a point of di­min­ish­ing re­turns. This oc­curs be­cause an in­dus­try’s struc­tural ca­pac­ity to gen­er­ate new value is capped by the very in­sights that led to its break­out in the first place.

For ex­am­ple, the same sys­tems that were de­vel­oped in the 1920s to sup­port the emer­gence of the mod­ern au­to­mo­bile in­dus­try ul­ti­mately be­come lim­ited in their ca­pac­ity to cre­ate new value. There is only so much value that can be cre­ated through

A moon­shot is a route to re­newed lead­er­ship un­der rad­i­cally new tech­no­log­i­cal and cul­tural con­di­tions.

the sale of mo­tor­ized ve­hi­cles pow­ered by com­bus­tion en­gines sold through fran­chised deal­er­ships, man­u­fac­tured in plants with his­to­ries of ad­ver­sar­ial man­age­ment-union re­la­tion­ships, and sup­ported by a con­stel­la­tion of re­lated in­dus­tries, such as gas sta­tions, road­way con­struc­tion and main­te­nance, re­pair fa­cil­i­ties, etc.

An im­por­tant char­ac­ter­is­tic of in­dus­try ma­tu­rity is that firms fo­cus in­ten­sively on man­ag­ing their costs, which they nor­mally keep low by be­com­ing large enough to achieve economies of scale in the pro­cesses that gen­er­ate goods and ser­vices. Lead­ing com­pa­nies in ma­ture in­dus­tries cre­ate value for large numbers of cus­tomers pre­cisely be­cause they have be­come rou­tinized and ra­tio­nal­ized. The emer­gence of in­ter­lock­ing sys­tems of re­la­tion­ships, in­cen­tives, reg­u­la­tions, ac­tiv­i­ties and as­sets per­pet­u­ates the in­dus­try struc­ture pre­cisely be­cause large numbers of stake­hold­ers are en­fran­chised in its suc­cess.

So, in short, why does dis­rup­tion oc­cur? Be­cause of the po­ten­tial for break­ing through the lim­its on value. Ma­ture in­dus­tries are based on ap­proaches to value cre­ation con­structed a gen­er­a­tion prior to their ma­tu­rity, which means that they in­cor­po­rate ideas that are widely ac­cepted, but in­creas­ingly out­dated. It is aging ideas, not tech­nolo­gies or in­cen­tives per se, that cause the po­ten­tial for dis­rup­tion.

The in­cen­tive to dis­rupt, de­picted in Fig­ure Two, re­flects the po­ten­tial to achieve a ma­jor in­crease in value cre­ation us­ing ideas, tech­nolo­gies and ap­proaches that break through the lim­its on value cre­ation. The po­ten­tial arises be­cause of the ac­cu­mu­lated com­pro­mises that cus­tomers, sup­pli­ers and even the in­dus­try it­self have made due to the in­creas­ingly-out­dated ap­proaches baked into the es­tab­lished in­dus­try struc­ture.

The op­por­tu­nity for a ma­jor break­through may rest on tech­no­log­i­cal ad­vances, but the break­through be­comes mo­ti­vated in par­tic­u­lar by an aware­ness that a new busi­ness model is en­abled by tech­nol­ogy — new ideas en­abled by tech­nol­ogy that cre­ate so much more value than the es­tab­lished ap­proach that it is worth go­ing through the ‘pain’ of dis­rup­tion.

This pain re­flects that the early phases of dis­rup­tion are nor­mally un­prof­itable and fraught with risk. In­deed, a very high per­cent­age of en­tre­pre­neur­ial ven­tures fail — by some es­ti­mates, more than 95 per cent. The skills of suc­cess­ful en­trepreneurs in­clude build­ing early wins that can draw im­por­tant at­ten­tion and re­sources to the ven­ture; fail­ing early, when fail­ing be­comes in­evitable; and learn­ing from fail­ure for fu­ture it­er­a­tions. Be­cause fail­ure is so per­va­sive, the first buy­ers of prod­ucts and ser­vices may be sad­dled with ex­pen­sive and out­dated lugs. The ab­sence of reg­u­la­tion and sup­port­ing in­fra­struc­ture cre­ates other types of risk as well, in­clud­ing that prod­ucts pro­duced by the in­dus­try and jobs of­fered to em­ploy­ees are dan­ger­ous.

But if the cur­rent regime is bogged down by too many ac­cu­mu­lated com­pro­mises, the pay­off to suc­cess­ful dis­rup­tion is con­sid­er­able. Pi­o­neer­ing firms that achieve the sta­tus of ‘break­away lead­ers’ be­come leg­endary, of­ten driv­ing so much value cre­ation that their early own­ers be­come wealthy be­yond prece­dent. These are high-risk, high-re­turn en­ter­prises. Es­tab­lished in­dus­tries fall into dis­ar­ray as lead­ers that once took their longevity for granted be­come threat­ened with large losses of rev­enue and even bank­ruptcy; just think back to Gen­eral Mo­tors, Ko­dak and Block­buster Video.

Or­ga­ni­za­tions that suc­cess­fully ac­com­plish moon­shots have one thing in com­mon: they are busi­ness-model in­no­va­tors.

Face­book, Netflix, Google and ebay in­te­grated tech­no­log­i­cal in­sights into ways of de­liv­er­ing so much value to their stake­hold­ers that they be­came iconic. But it is not in­evitable that the break­through in value be ac­com­plished by a new­comer or a tech­nol­ogy com­pany. In­creas­ingly, es­tab­lished com­pa­nies are find­ing ways to make moon­shots hap­pen by push­ing through the lim­its baked into their in­dus­try struc­tures. Kaiser Per­ma­nente, GE, Zip­car, Charles Sch­wab and JP Mor­gan Chase have rein­vented them­selves to drive large-scale in­creases in value cre­ation that ben­e­fit not only these com­pa­nies, but also their cus­tomers and sup­pli­ers.

Dis­rupt­ing your­self to achieve a break­through is among the most dif­fi­cult chal­lenges that a suc­cess­ful com­pany can face. The process of trans­for­ma­tion in the or­ga­ni­za­tions that suc­ceed be­gins with a care­fully ne­go­ti­ated and con­structed goal—a moon­shot — and then con­tin­ues with the re­lent­less and un­com­pro­mis­ing pur­suit of that goal, in col­lab­o­ra­tion with both new and old stake­hold­ers.

The tran­si­tion path from the es­tab­lished busi­ness to the in­no­va­tive model re­quires years of painstak­ing work to rene­go­ti­ate con­tracts, set­tle old prob­lems, and build trust and ca­pa­bil­ity. But the work is worth it, pre­cisely be­cause the break­through in value yields a large-scale im­prove­ment on ful­fill­ing the or­ga­ni­za­tion’s mis­sion.

Ac­com­plish­ing this kind of break­through re­quires dis­ci­pline, com­mit­ment, and a mis­sion-driven sense of pur­pose — all of which char­ac­ter­ized of Kennedy’s vi­sion for reach­ing the moon by the end of the 1960s.

The Con­cept of Fu­ture-back

In a 2013 ar­ti­cle en­ti­tled “What a Good Moon­shot is Re­ally For”, Scott D. An­thony and Mark John­son ex­plained how adopt­ing a ‘fu­ture-back’ plan­ning hori­zon is in­te­gral to the idea of the moon­shot. Let’s take a closer look at what that means for the strat­egy process.

We are learn­ing that the process is most suc­cess­ful when the moon­shot is a loosely held, flex­i­ble ex­pres­sion of how the or­ga­ni­za­tion can cre­ate value through busi­ness-model in­no­va­tion. Kennedy’s ar­gu­ment for why the U.S. should in­vest in send­ing a man to the moon rested on the idea that the na­tion’s very pur­pose would be ful­filled by the achieve­ment of this goal — and that the na­tion would be put in jeop­ardy by its fail­ure.

For any or­ga­ni­za­tion, the moon­shot must rest on ful­fill­ment of its mis­sion and an aware­ness of what tech­nol­ogy can de­liver on a five- to ten-year hori­zon. Why five to ten years? This time hori­zon is a rule of thumb rather than a hard-and-fast re­quire­ment. The idea is that it usu­ally takes this long for some­thing ma­jor to hap­pen at the level of a sys­tem. In fact, im­ple­ment­ing the change in its en­tirety may take much longer than ten years; but five-to-ten years is usu­ally suf­fi­cient for a break­through. In 1962, Kennedy set the goal for the end of the decade, and it was July 20, 1969, when Neil Arm­strong stepped off the Ea­gle into the Sea of Tran­quil­ity.

Be­cause busi­ness-model in­no­va­tion is an ex­per­i­men­tal process, and be­cause un­know­able tech­no­log­i­cal changes may oc­cur over the plan­ning hori­zon, it is im­pos­si­ble to spec­ify the de­tails of a moon­shot with pre­ci­sion. What you need to be is di­rec­tion­ally cor­rect about the de­tails — to be about 75 per cent right — to get started on a con­ver­sa­tion about busi­ness-model in­no­va­tion with crit­i­cal stake­hold­ers.

The next step is to iden­tify steps that take you out of the gate to­ward achiev­ing the goal. Most es­tab­lished or­ga­ni­za­tions can­not sim­ply step away from their cur­rent com­mit­ments and suc­cesses — and ‘build­ing a bridge as you walk over it’ car­ries the risk of be­ing con­sumed by the day-to-day op­er­a­tional prob­lems that char­ac­ter­ize es­tab­lished busi­ness mod­els un­der the stress of be­com­ing out­dated.

This stress can­not be over­stated. Any CEO of a pub­lic com­pany that must de­liver on earn­ings tar­gets — es­pe­cially if the or­ga­ni­za­tion car­ries debt and em­ploys a large work­force — faces un­be­liev­able fi­nan­cial and op­er­a­tional pres­sure to drive value out of its es­tab­lished busi­ness mod­els. For a leader who has been charged with stew­ard­ing a suc­cess­ful or­ga­ni­za­tion into the fu­ture, it is sim­ply im­pos­si­ble to si­mul­ta­ne­ously lead re­spon­si­bly and walk away from the le­gacy model.

Yet, at the same time, CEOS must find a way to deal with the en­croach­ing re­al­ity that the ideas that led to the suc­cess of their or­ga­ni­za­tion — the tech­nolo­gies, busi­ness mod­els and ecosys­tem ar­chi­tec­ture around the firm — are be­com­ing out­dated. Be­cause the prob­lem of in­no­vat­ing at scale is so con­cep­tu­ally chal­leng­ing, it can eas­ily be­come swamped by the prob­lems of mak­ing

It is aging ideas, not tech­nolo­gies or in­cen­tives perse, that cause the po­ten­tial for dis­rup­tion.

pay­roll and ful­fill­ing cus­tomer con­tracts and deal­ing with short­term reg­u­la­tory mat­ters and other crit­i­cal op­er­a­tional de­mands. So, how do you get out of the gate?

What is needed is both a vi­sion for a new sys­tem and a process for mi­grat­ing from the cur­rent sys­tem to the new one. The­o­ries from the fields of en­trepreneur­ship and strate­gic man­age­ment of­fer in­sight on how to move for­ward.

As tempt­ing as it is to con­tem­plate the range of changes that would make the cur­rent sys­tem bet­ter, that is not the best place to be­gin. The rea­son is that, if you try to build a bridge to a fu­ture that you haven’t yet en­vi­sioned, then you will get stuck soon af­ter you be­gin. In­stead, you need a clear vi­sion for what is pos­si­ble, based on new ideas, tech­nolo­gies and pro­cesses.

Rough­ing out the im­pli­ca­tions of the moon­shot for the lad­der of ca­pa­bil­i­ties, con­ver­sa­tions and com­mit­ments that the or­ga­ni­za­tion will need is enough to get started. Un­fore­see­able changes will in­evitably re­quire ad­just­ments on the path to­ward re­al­iz­ing the goal, but what is needed in the be­gin­ning is to cul­ti­vate a shared un­der­stand­ing of what is pos­si­ble, in prin­ci­ple, to in­spire and guide change. Once that hap­pens, re­fin­ing the moon­shot be­comes a con­ver­sa­tion — a process — that the lead­er­ship team can re­turn to pe­ri­od­i­cally.

Once the moon­shot has been en­vi­sioned and the path has been roughed out, how do you move for­ward? The an­swer de­pends on the spe­cific sit­u­a­tion fac­ing the or­ga­ni­za­tion, of course, but three crit­i­cal prin­ci­ples nor­mally emerge.



A break­through busi­ness model will in­evitably SITION PATH. raise ques­tions about the roles of com­mit­ted stake­hold­ers — in­clud­ing em­ploy­ees and sup­pli­ers — that may not ini­tially have the ca­pa­bil­i­ties, in­ter­est or in­ten­tion to par­tic­i­pate in the moon­shot. How do you get these stake­hold­ers on board? It is crit­i­cal at the early stages of a trans­for­ma­tion to iden­tify peo­ples’ frames of mind; their is­sues and con­cerns; and the ex­pec­ta­tions of ev­ery­one who will be in­te­gral to the change. In my stud­ies of trans­for­ma­tion, I have found that great lead­ers tend to talk at least as much about how the change will ben­e­fit core stake­hold­ers as about the change it­self.



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