By Howard Yu
Many of today’s business leaders are increasingly facing the threat of their core businesses being encroached upon by upstarts outside of their industries. Despite their best efforts to instill innovation, their organizations are unyielding.
Perhaps just as obvious for many executives in 2019 is the impetus to leverage connectivity and AI as part of their corporate strategies. No carmaker, for instance, would speak to investors without mentioning “future mobility.” In contrast to the personally owned, gasoline- powered, human-driven vehicles that dominated the last century, these carmakers know they’re transitioning to mobility services based on self-driving electric vehicles that will be paid for by the trip, by the mile, through a monthly subscription, or a combination of all three. In the past, mobility was created via the individual cars manufacturers sold. In the future, mobility will be produced by service companies operating various kinds of self-driving vehicles in fleets.
A team of researchers and I at IMD business school in Switzerland have been tracking how likely a firm is to successfully leap toward a new form of knowledge. These rankings measure companies in each industry using hard market data that is publicly available and has objective rules, rather than relying on soft data such as polls or subjective judgments by raters. For carmakers, it’s the shift from mechanical engineering with combustion- engine experts to electric and programming experts of the same kind as those who build computers, mobile games, and handheld devices. For consumer banking, it’s the shift from operating a traditional retail branch with knowledgeable staff who provide investment advice to running data analytics and interacting with consumers the same way an e-commerce retailer would. The pace of change may differ among industries, but the overall directional shift is undeniable.
CHARACTERISTICS OF TOP PERFORMERS
What differentiates the top companies from those in the middle is that the top performers don’t just focus on the nuts and bolts of innovation, such as gathering data, tweaking formulas, iterating algorithms in experiments and different combinations, prototyping products, and experimenting with business models. The top performers go beyond the implementation of innovation, understanding that scaling up these new ventures demands different patterns of resource allocation, corporate structures, and financing methods. New ventures like self-driving cars, electric vehicles, or car-sharing platforms are likely to suffer financial loss for years and, in the foreseeable future, will be unlikely to achieve the level of profitability of the core business of the car company. For example, BMW and Toyota have been profitable for a long time, whereas Uber is still operating at a loss today, as is Tesla. This is why industry incumbents need to consider an alternative investment structure, allowing third parties, VCs, and even competitors to take an equity stake. Such a structure seems controversial, but it’s not unprecedented.
If there is one comforting thought, however, it’s that the very pressure for companies to leap forward and embrace new technologies and discoveries in the face of uncertainty is nothing new. For decades, the companies that thrive have been the ones that have proactively assimilated new knowledge outside their own sector and then selectively imported new ideas to reinvent how they deliver their services or offerings.
With the rise of smart machines and artificial intelligence, where everything you know as an expert can potentially be turned into machine algorithms and then copied by a few strokes on a keyboard, it’s paramount to discern what areas of your work will remain uniquely human and where human creativity, empathy, and sense-making cannot be easily displaced by the soulless machines.
HOWARD YU is the author of LEAP: How to Thrive in a World Where Everything Can Be Copied. He is LEGO professor of management and innovation at the IMD business school in Switzerland and director of IMD’s signature Advanced Management Program.