About the book
This book is a result of research that begin 2011 in IMD in Switerland.
Thea idea of the book is fairly simple. Howard Yu has studied how companies leap from a discipline from another. His work is similar to Jim Collinses studies about good companies turning into great companies:
1) LEAP: Mr. Yu just goes one step further to study the actual transformation process.
2) CANNIBALIZE: He explores the unwillingness to cannibalize existing sales and the obsession over marginal cost
3) LONG-TERM PROSPERITY: “But the reason why so few companies have managed to leap is easy to understand: executives are often asked to trade secured, near-term profits for uncertain, long-term prosperity.”
4) ABSORB CAREER RISK: “Corporate leaders need to absorb career risks that individual midlevel general managers normally shun. Success requires an exact combination of knowledge power and positional power.”
Our time is filled with need to leap, because of the digitalisation. This is why this book is very topical. Mr. Yu sees that intelligent machines and the emergence of ubiquitous connectivity will be the biggest seismic shift in our times.
Leap – P&G made leap from mechanical engineering to consumer psychology
Leap – the Basel pharmaceuticals’—from organic chemistry to microbiology.
Has your company leaped from one knowledge discipline to another in the past? From Ixonos to Digitalist.
What are the key learnings?
“Meaning of the book is to explain and predict how companies can prosper…. Throughout this book, I will compare the industry histories and the actions that different companies have undertaken. Contrasting their diverging outcomes, I will distill five fundamental principles at work. These principles both explain and predict how companies can prosper when labor, information, and money move easily, cheaply, and almost instantaneously.”
Key learnings or the main principles are:
· Principle 1: Understand your firm’s foundational knowledge and its trajectory.
· Principle 2: Acquire and cultivate new knowledge disciplines.
· Principle 3: Leverage seismic shifts.
· Principle 4: Experiment to gain evidence.
· Principle 5: Dive deep into execution.
Cases are companies such as Yamaha, Procter & Gamble, Novartis and John Deere.
All companies are on a race to the bottom. Some companies can avoid it and even prosper, because they leap. Leap is a different way of thinking about and leading the business. Why does only few companies leap? Because they are in a hurry on managing their current business.
“The only way to prosper under such conditions over long periods is to leap: Pioneers must move across knowledge disciplines, to leverage or create new knowledge on how a product is made or service is delivered. Absent such efforts, latecomers will always catch up. Why, then, don’t pioneering companies leap more often? Complicating this matter often is the fact that executives are under tremendous pressure to meet the ongoing demands of their current businesses. What is good in the long run hurts in the near term. To be ready to leap would therefore require a different way of thinking about and leading the business.”
Yu also explains part of the success is based on luck like Jim Collins also does… “Granted, some firms are born lucky in their industries: new discoveries by the scientific community render the matter of where to leap a no-brainer.”
Or so the explanation goes
“Why is it that knowledge and expertise mercilessly fled across the border from the Piedmont and Hong Kong, while Switzerland’s homegrown industries continue to remain solid, intact, and prosperous? Typical explanations:
1. “Pharmaceuticals are more high-tech than textiles and toys,” or “Big Pharma owns a lot of patents,”
2. A second common explanation for the disparity concerns the nature of knowledge itself. Some executives rightly point out that pharmaceutical discovery remains highly uncertain and risky. This is evident from Novartis’s astronomical research and development costs, which it incurs with no guarantee that a drug will succeed in clinical trials and eventually make it to the marketplace. Today, commercializing a single new drug can average some $ 2.6 billion, with the amount projected to double every five years.
By comparison, the innovation efforts in such sectors as textiles, electronics, wind turbines, and solar panels are far less costly and more predictable. From this perspective, as long as a company operates within a sector in which product development remains highly uncertain, the window of opportunity remains closed to latecomers looking to threaten existing incumbents. Rich experience, deep knowledge, and subject expertise are needed to tackle complex problems inherently unpredictable; the barriers to entry are simply too high for inexperienced latecomers to overcome. Or so the explanation goes.”
Principles
Principle 1: Understand your firm’s foundational knowledge and its trajectory.
⁃ Why incumbents find it so difficult to preempt new competition?
⁃ To avert this dangerous trajectory would require executives to, first and foremost, reassess a firm’s foundational or core knowledge and its maturity. Circumventing the danger must begin by knowing where we are.
Principle 2: Acquire and cultivate new knowledge disciplines.
⁃ Competitive advantage depends most critically on the assimilation of new knowledge and the timely creation of new markets and new businesses.
⁃ Only by forging ahead, rather than refining what has already been, can a pioneer avoid being caught by copycats. Such is how the once little-known Basel-based pharmaceutical firms have managed to stay ahead for nearly a century and a half.
⁃ Granted, some firms are born lucky in their industries: new discoveries by the scientific community render the matter of where to leap a no-brainer.
Procter & Gamble has maintained its leading position in household consumer goods by leaping toward new knowledge disciplines.
Principle 3: Leverage seismic shifts.
⁃ Two intertwining forces will propel all companies into the second half of the twenty-first century: the inexorable rise of 1) intelligent machines and the emergence of 2) ubiquitous connectivity.
⁃ All winners must leverage the seismic shifts around them and leap accordingly.
Principle 4: Experiment to gain evidence.
⁃ Donald Rumsfeld’s phrase of “unknown unknowns,” executives may not even be aware that they don’t possess a critical piece of information.
⁃ To facilitate evidence-based decision making, managers must carry out frequent experimentation to reduce the dark space of ignorance and to arrive at conclusions with the required level of familiarity.
⁃ The biggest risk that threatens the survival of a large and complex organization lies in political infighting and collective inaction.
⁃ Experimentation is the window of truth to let light in from outside.
Principle 5: Dive deep into execution.
⁃ Awareness is not the same as commitment, so insights alone never suffice.
⁃ What makes it so hard for pioneering companies to leap, however, is that game-changing ideas can easily be filtered out as business proposals move up the corporate ladder.
⁃ Committed executives at the very top must be ready to intervene and implement a new directive when necessary. I call the instances in which top executives personally intervene at critical junctures, wielding the power to overcome specific barriers, the CEO “deep dive.” Deep dives are different from micromanagement because they rely on knowledge power rather than position power.
⁃ Thinking doesn’t equate to doing.
PART I WHAT HAPPENED
1 THE PIANO WAR: WHEN STRENGTH BECOMES A WEAKNESS
Those who cannot remember the past are condemned to repeat it. —GEORGE SANTAYANA, PHILOSOPHER (1863–1952)
“German immigrant named Henry Engelhard Steinway launched his piano-making firm with a plan to “build the best piano possible” by “treating each and every piano better than many doctors treat their patients.”
Steinway vs. Yamaha’s success to the following factors:
“(1) A entrepreneurial sales manager who relentlessly pursued the American market;
(2) The piano market boom in Japan, which allowed Yamaha to achieve economies of scale in its home base;
(3) The automation of the manufacturing process, which drove down the cost of production even further;
(4) Yamaha’s voracious desire to produce concert grands, entering an ever-more-profitable segment of the market; and
(5) A visionary leader who persisted with his expansion strategy over the course of three decades.”
“The company that has mastered automation early on will naturally become the big winner, taking advantage of a growing industry. This is how Yamaha’s meteoric rise began. This is how Steinway & Sons spiraled into decline, in large part due to its myopic obsession with craftsmanship at the expense of technological advancement and automation.”
“With a far bigger balance sheet, a diverse set of technologies, and many advanced production techniques, Yamaha could marshal many more resources in marketing, distribution, recruitment, and production. The money it gained from the low-end segment had become the wellspring that allowed it to enter the high end. The most remarkable part of this outcome is perhaps the fact that all these changes occurred while the underlying product stayed constant, which only makes Steinway’s predicament all too painful to watch. Simply put, a piano involves hammers striking strings to make sound, as it has always been. The function and form of the finished goods and the requirements of leading artists had barely changed.”
“They provide the immediate explanations for Yamaha’s success but do not articulate the ultimate cause. We need water to stay alive. This is what I call the ultimate cause in that the explanation goes back further along the chain of causation, referring to the fundamental condition that sets in motion the unfolding of fortuitous events.”
Competitive myopia….
“At the height of the rapid ascendancy of Japan’s economy in the 1980s, Harvard professors Robert Hayes and William Abernathy published an influential article in the Harvard Business Review titled “Managing Our Way to Economic Decline.” The authors accused American managers of relying too heavily on short-term financial measurements, such as return on investment (ROI), to guide investment decisions instead of taking a long-term view of product and technological development. American managers, in their view, were collectively suffering from “competitive myopia.” Profits had gone into shareholders’ pockets instead of updated machinery.
“Carliss Baldwin, together with the former dean of Harvard Business School, Kim Clark…… The authors offered a simple explanation for the seemingly irrational managerial behaviors. To evaluate investment opportunities, managers would often run the numbers through financial analytical tools, such as discounted cash flow (DCF) or net present value (NPV) calculations. The crux of such an exercise is comparing the investment proposals with the alternative scenario of not investing or doing nothing. To project the future cash flows or returns of different options, one has to extrapolate historical data. And by extrapolation, managers often assume that the present health of the company will continue indefinitely as long as the existing production system is adequately maintained.”
“But this is a dangerous premise. It’s an unrealistic assumption that causes too many companies to hesitate to launch a new product with a lower margin than the existing one. These two forces:
1. Cannibalize – the unwillingness to cannibalize current sales and
2. Leverage – the tendency to leverage what we have today
….. deprive many investment projects that pioneering incumbents desperately need to stay ahead in the long run.”
“Yamaha was starting from the bottom of the heap, and its investors were accustomed to a much lower level of profitability than Steinway’s. Ironically, their dimmed expectations had enabled Yamaha to invest in new capabilities and take on new markets. Investment at Yamaha wasn’t an option, it was oxygen. At Steinway, it was always agonizing. What you see depends on where you stand.”
WHEN STRENGTH BECOMES A WEAKNESS
The problem that Steinway faced was not uniquely American, nor was it specific to piano making. The problem was a pattern of thinking that had led to serious trouble for companies in all industries globally. The unwillingness to cannibalize existing sales and the obsession over marginal cost also explains why British cotton producers were slow to invest in new production methods, while Francis Lowell and his compatriots raced ahead.
“The knowledge funnel implies that any competitive advantage is transient. What made companies succeed as early pioneers won’t keep them in the leading position as industry knowledge matures. Steinway & Sons relied on the same advantage for too long.”
“From core competencies to core rigidities…. core competencies turned into core rigidities, preventing the firm from responding appropriately to the strategic threat that Yamaha posed.”
“What business are you in and what core knowledge you have? ….. Managers must ask themselves what knowledge discipline is the most fundamental to their company. What is the core knowledge of their business? And how mature or widely available is it?”
2 THE FIRST ADVANTAGE OF A PIONEER: WHEN COMPETITION WORKS LIKE A MUDSLIDE
Just because something doesn’t do what you planned it to do doesn’t mean it’s useless. —THOMAS EDISON, AMERICAN INVENTOR
Data collection, analysis, insights, and action—the four basic steps in data-driven decision making—became the corporate norms at P& G.
“Unlike John Wanamaker, the twentieth-century department store tycoon who famously quipped, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half,” 88 information at P& G with humdrum detail soon filled cabinet after cabinet of company notebooks.”
THE EARLIEST DATA WIZARDS
Together with Harry W. Brown, 86 the head of advertising, they pored over mountains of data in an effort to identify discernable patterns of marketing initiatives that would lead to positive results. And it was the new knowledge rooted in consumer psychology that enabled P& G to innovate so differently from all other consumer package brands.
Two purposes:
1. First, the more modern history provides us with an inside perspective on how tumultuous changes and difficult trade-offs were actually made.
2. Second, by amassing more data points over the long histories of these firms, we can be more confident that our conclusions have not been inadvertently cherry-picked.
“Strategy, of course, is never about achieving perfection: it’s about shortening one’s odds, at best. Here we’re about to see how the senior leaders of large established organizations maximized their chances to prosper.”
3 THE SECOND ADVANTAGE OF A PIONEER: HOW KNOWLEDGE IS HARNESSED
It’s not hard to make decisions when you know what your values are. —ROY E. DISNEY, FORMER SENIOR EXECUTIVE OF THE WALT DISNEY COMPANY (1930–2009)
It’s kind of fun to do the impossible. —WALT DISNEY, AMERICAN ENTREPRENEUR
“In every company, there are two competing approaches through which corporate strategy can be realized.
1. One is deliberate; the other, emergent.
2. Deliberate strategy tends to be highly methodical and analytical.”
“Former Intel chairman Andy Grove observed, “In my experience, [top-down strategic plans] always turn into sterile statements, rarely gaining traction in the real work of the corporation. Strategic actions, on the other hand, always have real impact.”
By 2012, only seventy-one companies that had appeared on the original Fortune 500 list in 1955 were still on it. 35 The life span of a Fortune 500 company is about thirty years. And yet, P& G still occupied the top shelf at number 34 out of 500 in 2016, commanding more than $ 200 billion in market capitalization.
P&G made three leaps…. “A family firm whose founders stirred cauldrons by hand had now become an enterprise built on three knowledge foundations:
1. mechanical engineering,
2. consumer psychology, and
3. organic chemistry.”
PART II WHAT WILL HAPPEN
4 LEVERAGING UBIQUITOUS CONNECTIVITY: FROM LONE GENIUS TO THE WISDOM OF THE CROWD
“We tend to believe that human ingenuity resides in the minds of a few individuals. They are the prime movers who shape the world as we know it. Friedrich Nietzsche would say, “One giant calls to another across the desert intervals of time and, undisturbed by the chattering dwarfs who creep about beneath them.”
“But with our world becoming ever more connected, that may no longer be true. In fact, the chatters among the dwarfs can outsmart an intellectual giant.”
Tom Kelley, partner at the design firm IDEO and a professor at Stanford University, would say, “Enlightened trial and error succeeds over the planning of a lone genius.”
“Chinese have cracked the micropayment code….. But in China, storing user data could pose a political risk so high that local firms have chosen to find other ways to get consumers to pay, either by charging transaction fees or through in-app purchases—why mine data when customers would pay directly for services?”
“If people feel like it’s a choice or something they enjoy because it helps someone else—it’s much less taxing. If they feel like they have no autonomy, if they’re just following orders, their willpower muscle gets tired much faster.”
5 LEVERAGING MACHINE INTELLIGENCE: FROM INTUITION TO ALGORITHM
Count what is countable, measure what is measurable, and what is not measurable, make measurable. —GALILEO GALILEI, ASTRONOMER (1564–1642)
Not everything that can be counted counts, and not everything that counts can be counted. —WILLIAM BRUCE CAMERON, INFORMAL SOCIOLOGY, 1963
“2002: Over the years, a competing group used a machine algorithm called Amabot to generate recommendations based on customers’ web searches and previous purchases. Characteristically Amazon, CEO Jeff Bezos let the two groups fight on, pitting personable, handcrafted messages against standard, automatic recommendations. Before long, the commercial results showed that humans couldn’t compete in driving sales.”
“In February 2011, IBM made a deep impression on the American public when its supercomputer Watson beat human contestants in the popular game show Jeopardy!”
Wanda shopping center… “By triangulat[ ing] sales volume with the inflow of shoppers, we can predict which tenant might run into financial trouble months in advance. This helps us collect receivables better,” explained the manager.
“Among business school academics, the “network effect” is a common refrain that explains the rise of Uber, Airbnb, and Alibaba. In each of these cases, the company took on the role of a two-sided marketplace, facilitating selling on the supply side and buying on the demand side to enable the exchange of goods or services. The value of such a platform depends, in large part, on the number of users on either side of the exchange. That is, the more people that use the same platform, the more inherently attractive the platform would become—leading even more people to use it.”
“While many Japanese and, later, Korean manufacturers have developed their in-house capabilities in electronics, European and American manufacturers tend to “stick to their core,” by outsourcing the design and manufacture of electronic circuitries to third parties. The result is that those with in-house capabilities can integrate products with new functionalities ahead of the competition, while others only follow existing market trends, incorporating features already commonly found in the marketplace.”
THE SECOND MACHINE AGE
”In my executive class, managers often express a grave concern about how fast artificial intelligence is unfolding—so fast that they become afraid of committing to a supplier, or any standard, since there might be a better solution tomorrow. But precisely because we are living in a world of accelerated change, as far as machine intelligence is concerned, one must stay in the know. That was the basic reason that Recruit decided to set up an AI lab in-house.”
“This is akin to the cheap and powerful cloud computing upon which Netflix, Airbnb, and Yelp depend. Until very recently, any Internet businesses needed to own and build expensive servers and resource-intensive data centers.”
6 LEVERAGING MANAGERIAL CREATIVITY: FROM BIG DATA TO HUMAN INTEREST
BETWEEN MYSTERIES AND PUZZLES TWO TYPES OF QUESTIONS BOMBARD EXECUTIVES EVERY DAY.
1. One is puzzles, and
2. the other, mysteries.
“What your competitor is about to launch is a puzzle—a problem that can be solved only if you have the correct data. So is the question of whether Russia tried to influence the results of the 2016 election in Trump’s favor. It’s hard to know unless you have more information. The key to solving a puzzle is therefore better intelligence and sharper calculation.
But when Albert Einstein said, “We can’t solve problems by using the same kind of thinking we used when we created them,”
Einstein was referring to the second type of problem: a mystery. Mysteries abound in the business world. The question of what your customers really need, for instance, is often a mystery. In most situations, corporate executives have an array of tools—from in-depth focus groups to large-sample surveys to big data from social media—to uncover the needs, wants, and aspirations of consumers. Challenges arise when consumers don’t know what they want or cannot even articulate an approximate solution to address those unmet needs, or when the status quo of an industry has become so entrenched that it is impossible for anyone to envision an alternative. And so the old saying that railroad companies got into trouble because they let others—cars, trucks, airplanes, and even telephones—take customers away from them, assuming themselves “to be in the railroad business rather than in transportation.”
“When an editor asked him how much market research had gone into the iPad, “None” was still Steve’s reply.”
“The late Bill Moggridge, director of the Cooper-Hewitt National Design Museum in New York City, once said, “Engineers start with technology and look for a use for it; business people start with a business proposition and then look for the technology and the people. Designers start with people, coming towards a solution from the point of view of people.” Tim Brown, the CEO of the world’s largest design house, IDEO, went further. He referred to design thinking as “more than style,” but “getting under the skin” of end-users, channeling innovation efforts through the empathic lens of a careful anthropologist.
“At Stanford’s Hasso Plattner Institute of Design, or, as it’s often known, “the d.school,” two basic elements of design thinking are taught: empathy—understanding the human emotions, goals, and needs that a design must address—and rapid prototyping—developing quick and cheap solutions and updating them rapidly in response to users’ actions and suggestions.”
“A new magnetic resonance imaging (MRI)…. The result was the Adventure Series, through which young children were transported into an imaginary world where the scanning process was part of an adventure. Hospital wards included “Pirate Island,” “Jungle Adventure,” “Cozy Camp,” and “Coral City.” 25 In one of them, children would climb into the scanner’s transfer unit, which had been painted like a canoe, and then lie down. The normally terrifying “BOOM-BOOM-BOOM” noise of the scanner became part of the adventure—it was the sound of an imaginary canoe taking off. “They tell children to hold still so that they don’t rock the boat, and if you really do hold still, the fish will start jumping over the top of you,” Dietz said. Children loved the experience so much that they begged their parents to let them do it again. Sedation rates went down by 80 percent, while parent satisfaction rose by an astounding 90 percent.”
MAKING A CREATIVE LEAP
Machine learning and big data concern themselves with correlation, not causation.
“One last piece of supportive evidence. An investigation by Boston University economist James Bessen found that jobs and automation often grow hand in hand, that automation creates more jobs than it destroys.”
What to do? “So, what must executives do in the age of smart machines? The key is to automate as many routine cognitive tasks as possible. Free your people up from white-collar drudgery so as to leverage their fundamental human advantage, to solve problems of the next frontier creatively.”
PART III WHAT NEEDS TO HAPPEN NEXT
7 FROM INSIGHTS TO ORGANIZED ACTIONS Don’t ask managers
“What is your strategy?” Look at what they do! Because people will pretend. —ANDY GROVE, INTEL’S FORMER CEO AND CHAIRMAN (1936–2016)
THE REFRAIN “IF YOU DON’T KNOW WHERE YOU’RE GOING, ANY road will take you there” captures the importance of managers developing a point of view about the world.
Emergent strategy…. In the words of former US secretary of defense Donald Rumsfeld, these are circumstances in which “we don’t know what we don’t know.” This is when strategy must become emergent.
15000 vs. 370 vs. 65
Still, Echo has mastered a staggering fifteen thousand skills, including Uber (hail a ride), Fitbit (review health statistics), Mixologist (look up a cocktail recipe), and Domino’s (order a pizza), plus applications from other device makers, such as Philips, Samsung, and General Electric. Meanwhile, Google has some 370 voice apps available as of June 30, 2017, and Microsoft, a paltry 65.
On this point, Bezos wrote his instruction in an e-mail that ended with his characteristic signature: “Anyone who doesn’t do this will be fired. Thank you; have a nice day!”
“Bezos about winning this business that he insisted all services on the platform be built on open APIs, which allowed Amazon’s computer servers to communicate easily with external parties over the standard web protocol.
“Such an authoritarian tactic would seem unthinkable at Google, but it’s precisely the kind of intervention that breaks silos in large companies.”
“The CEO must sometimes absorb career risks that individual midlevel general managers would shun. This is exactly what Jeff Bezos, Jonney Shih, and Steve Jobs have done.”
Executives duty while leaping….
“So, there we have it. When the required innovation becomes disruptive, staffing the team appropriately and giving it autonomy are necessary but insufficient. Every time an organization successfully leaps into a new knowledge base, as we saw in Part 1 at Novartis and P& G, the senior leaders need to go beyond formulating a strategy and should get their hands dirty during its implementation.”
“Corporate leaders need to absorb career risks that individual midlevel general managers normally shun. Success requires an exact combination of knowledge power and positional power. That entrepreneurial spirit and the corresponding behaviors exhibited at the apex of the enterprise remain, perhaps, the critical functions of the CEO role, which cannot be delegated. These are the chief functions of a top executive.”
Important message to each company…. “Three leverage points shape the answer:
1. The emergence of ubiquitous connectivity,
2. The inexorable rise of intelligent machines, and
3. The changing role of human work on a stronger emphasis on human-centric creativity.
They will impact most firms over the next few decades and become part of everyday business life. They are the intersections where companies need to rewrite the rules of the game in their own favor.”
“WeChat and DARPA demonstrate that embracing open collaboration must go beyond soliciting volunteers and must also adhere to a set of principles: from parceling a complex problem into smaller pieces, to developing enabling toolkits and putting them into the hands of individuals.”
“Another leverage point is the automation of human intuition. Ubiquitous connectivity, the inexorable rise of intelligent machines, and a stronger emphasis on human-centric creativity.”
Companies that leaped….
“The plow maker thus turned into a tractor manufacturer almost overnight. Within the first year of the acquisition, 5,634 Waterloo Boy machines were sold. From metallurgy rooted in plow making, John Deere leapt into mechanical engineering. MyJohnDeere opened its doors to third parties in 2013, allowing input suppliers, agriculture retailers, local agronomists, and software companies to develop their own applications.”
How should we change according to the book?
1) LEAP
2) CANNIBALIZE
3) LONG-TERM PROSPERITY
4) ABSORB CAREER RISK
What should I personally do?
No great discovery was ever made without a bold guess. —SIR ISAAC NEWTON, MATHEMATICIAN (1643–1727)
Summary
The book in six words – “History doesn’t repeat itself, but it does rhyme.“
