The Attacker's Advantage

PART I    

THE FUNDAMENTAL LEADERSHIP CHALLENGE OF OUR TIME

CHAPTER 1    

Bends in the Road

TAKING CONTROL OF uncertainty is the fundamental leadership challenge of our time.

This is not a hypothesis extrapolated from arm’s-length research. It emerges from what I have learned in working as an advisor with hundreds of business leaders, ranging from board members to business unit managers, in scores of companies and multiple industries around the world. I have had close relationships with many of them over the course of several decades. These relationships have enabled me to track actions and decisions as they unfold. I talk regularly with hundreds of other leaders, always asking questions and exchanging information. Against this backdrop of experience, I can say with confidence that the immense uncertainty I see today’s business leaders facing is something truly unique. In its scale, its speed, the ferocity of its impact, and its increasing ubiquity, it is qualitatively different—by orders of magnitude—from anything that has gone before.

We all know that life is full of uncertainties, of course. Most of those that businesses face are familiar. Some are operational, such as optimizing production for shifts in demand, launching a new product, or adjusting to changing interest rates. Others are career uncertainties that can affect your job security or future opportunities, such as bad decisions made by bosses who favor less competent rivals. Some are macro: geopolitical conflict (on the upswing these days), climate change, and a seriously unstable global financial system.

What’s new is structural uncertainty. It is structural because the forces now at work can explode the existing structure of your market space or your industry, putting it at risk of being drastically diminished or completely eliminated. These forces are long term and irresistible. For those who are unprepared, the massive changes they bring are sudden bends in the road that appear seemingly without warning to obscure whatever future you envisioned for your business. But in a world economy projected to grow a net $30 trillion in the coming decade, human needs and wants are always changing. The opportunities are boundless for those who can anticipate and take control of them to create new businesses, new business models, new market segments, and even new industries.

Structural uncertainty is global and yet at the same time atomistic. A growing army of change creators everywhere is empowered by the Internet and low-cost wireless communication. In theory there are potentially seven billion of them: the entire population of the world. One could be Amol Bhave, a seventeen-year-old from Jabalpur, India, who is among the more than 800,000 people around the world who have signed up with the online educational venture edX, jointly sponsored by MIT and Harvard. In March 2013 he learned that he had been accepted at MIT after scoring 97 percent on edX’s circuits and electronics course. He told the Financial Times: “It opened doors to me for getting into colleges such as MIT which I could never even have dreamt of getting into from my town.”¹

Every day more of the seven billion have instant access to any and all knowledge and insights that exist, as well as the ability to collaborate with others as never before. Their ideas can be scaled up swiftly, because capital is readily available to fund promising ideas. For digital companies, the scaling can be accomplished extremely fast and at low incremental cost. On the other side of the coin, consumers have acquired great new powers because of digitization and online connectivity—including social media, reviews, and instant price comparisons—that give them information and options they never had before. Their preferences can shift en masse, even globally, destroying or diminishing whole industries and creating new ones—adding yet another dimension to the uncertainty. Finally, every uncertainty is magnified by quantum increases in the speed of change, largely brought about by the revolutions in computer and communications technologies.

The Essentials for Leading in Uncertainty

Steering your business through structural uncertainty will call for a distinctly different type of leadership than the one you were trained for and are likely currently exercising, requiring a radically different mind-set and new skills for anticipating events and going on the attack.

The advantage now goes to those who create change, not just learn to live with it. Instead of waiting and reacting, such leaders immerse themselves in the ambiguities of the external environment, sort through them before things are settled and known, set a path, and steer their organization decisively onto it. They conceive of a new need or a total redefinition of an existing need, often with a new business model in mind. They paint a specific picture of what the new company will be. Then they take the organization, along with its external constituencies, on the offensive.

No matter how successful it has made you, your past experience won’t ensure success in this new world. Most leaders moving up in an organization have received feedback and been rewarded for such characteristics as being a great communicator and motivator of people, having vision, being decisive, and above all else, delivering the numbers Wall Street wants. Most of the 360-degree evaluations companies use focus on essentially the same traits. I have yet to see one that includes those qualities that I believe are now crucial for meeting the fundamental leadership challenge of our time: perceiving the sources of uncertainty ahead of others, taking advantage of uncertainty to go on the offense, and preparing and steering the organization to adapt in tune with sudden changes in the environment.

Many leaders wait for uncertainties in the external environment to firm up before they react to them. With blind faith in the core competencies and momentum of their established companies, the deniers focus on the most immediate symptoms of shrinking margins and market share and fight back as they always have, typically by lowering prices, increasing promotions, cutting costs deeply, and improving service. Their rationalizations are reinforced by short-term but temporary success, holding Wall Street and its obsolescent metrics at bay (more about these metrics later).

Given the realities of the changes taking place now, these behaviors are rearview mirror thinking. Even if your company focuses on other skills and attributes, you should make it your personal challenge to prepare yourself to lead in the face of structural uncertainty.

From the time I first recognized the immensity of the changes under way today, I have worked to develop practical ways for business leaders to not just defend against them but instead take advantage of them. What I have found is that those who are best prepared to lead now and in the future in this era of big bends in the road have the following skills and abilities:

       1.  Perceptual acuity

       2.  A mind-set to see opportunity in uncertainty

       3.  The ability to see a new path forward and commit to it

       4.  Adeptness in managing the transition to the new path

       5.  Skill in making the organization steerable and agile

The remainder of this book explains each of these fully, gives you the tools and insights to develop them, and shows you how others have put them into practice.

Perceptual acuity. Have the psychological and mental preparedness to “see around corners” and spot potentially significant anomalies, contradictions, and oddities in the external landscape ahead of others. Some people are born with it, but it can be learned and even institutionalized. You can sharpen whatever skill you have if you continuously practice being on the alert, sensing the signals of change, and looking for the message in them. You can improve your acuity and cross-check your personal psychological biases by triangulating your perceptions with a diverse group of leaders and experts on a disciplined, regular basis. That will also widen the lens through which you see the world. Develop the habit of detecting sources of uncertainty, including the catalysts—the human beings who drive it—particularly those outside of your industry, and do the mental exercise of thinking through the potential implications. Searching for what is new and reflecting on what it could mean will help you see your business in a different light and spark ideas for new growth trajectories. You will need to expand your networks, relationships, and sources of information far beyond your company and industry, to include governments, nongovernmental organizations (NGOs), and ecosystem partners.

A mind-set to see opportunity in uncertainty. Recognize that uncertainty is an invitation to go on the attack and be ready to take your organization to a new place in the changing landscape. Unless you are caught by surprise and are totally short of time, you should never be on the defensive. Be intellectually honest when you sense a structural break, and accept reality when the core competencies that made your organization successful are no longer valuable or are potentially a hindrance to going in a more promising direction. Every journey encounters obstacles, but some are psychological and prevent you from getting off the ground. A keen awareness of your particular blockages will help you overcome them.

The ability to see a new path forward and commit to it. You have to be willing to build whatever new capabilities you will need, which will include a high level of proficiency in the use of digitization and algorithms. As you search for opportunities and crystallize a new game and a new money-making model, focus on the end-to-end consumer experience and imagine how external changes and digitization can allow you to create a new and compelling one. Pursue it with tenacity. Identify the obstacles you need to overcome and the blockages that stand in your way and attack them. Engage with your bosses and top team (and board of directors, if you are a chief executive officer) so they come around and see the same realities of the external environment. Don’t expect everyone to agree with your view of where to take the business, but have the courage of your convictions. Build a bridge of information with people in government to understand their views and help them learn about the structural uncertainties affecting your industry and its consumers.

Adeptness in managing the transition to the new path. Going on the attack may require a major shift as well as constant adjustment in setting priorities and ensuring financial health, particularly when it comes to cash. Stay connected to both external and internal realities to know when to accelerate and when to shift the short-term/long-term balance, with a sharp eye on cash flow and debt. You can win credibility with investors by creating and meeting milestones for the steps the organization will take in the near term to build the company’s future. You also have to seek and court investors who understand what you’re doing and will make the journey with you.

Skill in making the organization steerable and agile. You cannot succeed unless you bring the organization along with you in whatever new direction you take. Learn to make it agile, or steerable, by linking the external realities in real time to people assignments, priorities, decision-making power, budgeting and capital allocation, and key performance indicators (KPIs). The most powerful tool for achieving these goals is the “joint practice session” (JPS), in which leaders from across a company simultaneously share information, make decisions, integrate actions, and follow through. One major characteristic of the JPS is resolving the conflicts that are endemic to any organization. Another is redirecting resources and movements of people speedily in tune with changes in the external environment.

Get Ready for Discomfort

Taking advantage of the landscape that is emerging will almost certainly call for significant changes in how you define your business. Indeed, in many cases it will mean starting a new and different business that could sooner or later eclipse your biggest revenue maker or cash generator. Either of these courses is essentially an entrepreneurial act on a grand scale, one that leaders in legacy companies have little experience with. The risks make them uncomfortable, so they stall. They ignore the risk of not going into a new game and sticking too long with a business that is ripe for transformation, often through some form of digitization (remember, for example, Blockbuster, Kodak, and Borders).

India-based “Excelo” illustrates the sort of scenario you might face. It grew from an information technology outsourcing company to a powerhouse in helping companies redesign their IT processes to reduce cost, cut cycle time, and improve productivity. The dominant logic of its business has been labor arbitrage—that is, much lower labor costs than if the client company did the work in-house. It had long-standing ties with the IT shops of its customers and had superb expertise in their respective industries. But the CEO, who had had deep relationships with client companies throughout his career, noticed that a change was brewing. Customers were seeking help in using mathematics-based software solutions to radically change their businesses. Meeting that need would mean shifting Excelo’s focus and acquiring new expertise. Its core business was still making money, although margins were being squeezed by intense competition. Should the company make this shift? If so, it had to move fast before other companies jumped in. But that would mean hiring lots of people with new expertise, and sooner or later, letting many others go, including dedicated middle managers who had built the business but whose expertise was now obsolete. The head of Excelo now had uncomfortable decisions to make. Since the new trajectory would claim a growing share of the company’s financial resources, spending on the existing business must be cut back. By how much? How fast? Could the transition destroy the company’s heart and soul? How would the media react when so many good people were let go?

Such uncomfortable decisions are part of the new game. Senior leaders and boards at a growing number of companies are now wrestling with similar issues. The pressure affects middle managers, too; at the profit-and-loss (P&L) business unit level, the unnerving question is whether senior people will allow you to have lower earnings in the short run to pursue more promising opportunities. They face the formidable challenge of persuading their bosses to change their priorities.

Not every new trajectory will involve such dire issues, but the greatest risk of all is that leaders who face the need for radical change will deliberate too long and discover that the world has passed them by. At the right moment, you need the inner strength and conviction to take a leap when the outcome is uncertain. You have to move the organization at the right speed, with the right people, which means constantly adjusting it to steer through bends and twists.

HOW YOU DEAL with uncertainty as you move ahead puts you in one of two worlds. The first is the legacy world of core competencies, incremental gains, and defensiveness. The second is the one you have to be in if you want to be an attacker: the world of large-scale entrepreneurs who create a new need, scale it up quickly, and put a bend in the road for the traditional players.

CHAPTER 2    

Why Structural Uncertainty Is Different

WHEN I WAS growing up in India, my family ran a shoe shop in a town of 100,000 people forty miles north of Delhi. It was surrounded by farmland. Our customers were farmers, most of whom made a simple living. When the yearly monsoon came the farmers mainly stayed home. That was our dry spell: we sold very few pairs of shoes. We never knew exactly when the rain would start, how long it would last, or how heavy it would be—but we knew it would come, and we prepared for the dip in sales and potential cash shortage by reducing our inventory ahead of time. The precise timing of the monsoon was an operational uncertainty that we recognized and learned to manage around.

Now imagine that one day a construction crew arrives in my town and begins to lay the concrete and weld the steel that will soon become a superstore. This would be a structural uncertainty, and if we didn’t see it ahead of time, we would be out of business. The precise end of the monsoon doesn’t matter much when you’re being blown away by a structural uncertainty like this one.

You can manage an operational uncertainty with existing tools. But a structural uncertainty arises from your external environment. It is outside your control, and it can obliterate your business if you don’t detect it in time and create your own space in the new environment that is taking shape. A contemporary case in point is the decline of Dell Computer, one of the world’s most celebrated success stories. For three decades Michael Dell and his leadership team prospered with their “made-to-order model” as the heart of the business. It enabled them to know precisely which components were needed when, so they could meet customer demand quickly and with minimal extra components in inventory. With its high velocity of inventory turns, low margins, and low prices, Dell gained market share; with negative working capital,² it was a net cash generator on the order of a billion dollars every quarter. Dell became the highly profitable industry leader in market share.

Then Dell got hit with a double whammy. One was operational: IBM’s sale of its PC business to Lenovo in 2004. When the first two CEOs of Lenovo, both from the United States, didn’t work out, people said the Chinese company would never succeed. Then Yang Yuanging, a Chinese businessman and longtime leader at Lenovo, became CEO in 2009. He took an unusual approach by focusing on lower cost and innovation at the same time, and Lenovo attained number one market share in the world against Dell and HP. Lenovo’s lower prices put a squeeze on Dell’s margins and cash flow, resulting in a significant decline in Dell’s stock price.

Dell might have overcome this operational challenge, but at roughly the same time a killer structural change occurred: the introduction of tablets (Android based and Apple’s iPad) and smart phones. Like everyone else in the personal computer industry, Dell was blindsided by this development. It was one of the most dramatic shifts ever in that industry and signaled a fundamental decline in the desktop and laptop market. Dell’s great run came to an end because structural change meant that its core competencies were no longer a competitive advantage. (On a personal note, I have known Michael Dell for a long time, and no one should write him and his company off. He has taken Dell Computer private to give himself the freedom to place big bets on the future.)

Few industries are exempt from the threat of structural uncertainty—even basic and fragmented ones such as the taxicab business. Its economics have essentially not changed in decades of operating with regulated fares and high-priced medallions, which limit the number of competitors. For drivers and fleet owners, the major problems have been operating issues such as fuel costs and arguing with regulators about how to split the revenues. Now the model is being challenged by increasingly popular real-time ride-sharing companies such as Uber and Lyft, in which customers using mobile device apps arrange trips with operators of privately owned cars. They began to appear around 2012 in techsavvy San Francisco; by mid-2014 they had spread to major cities throughout the United States and around the globe. Regulators initially tried to ban the outfits, but more and more of them have yielded to the new reality of a service in wide demand. The California Public Utilities Commission, has even come up with a label that may become the standard definition: “transportation network companies.” European governments have been friendlier to the established operators, but as popular demand grows, fleet owners and drivers alike will be looking at a structural phenomenon that could decimate their business.

A structural uncertainty does not arise as suddenly as it seems; more often than not there are early warning signals that go unnoticed. Nokia had a fantastic brand, was highly profitable, and built dominant market share. Its near-demise—with an almost vertical, steep decline in revenues, margins, cash, and market share—took less than three years. The bend in the road was caused by Apple, which offered a new, compelling consumer experience. It was so enormously different that the consumer not only paid a high price but waited in line to gain access to it.

Nokia was taken by surprise—but it shouldn’t have been. My personal interaction with its CEO two years before the introduction of the iPhone indicated that the company was aware of it, with a particular early warning signal coming from people at Nokia reading Apple’s patent filings. But the leadership team found it hard to believe that a computer company would go into the cell phone business and thought that Apple would not be a threat even if it did, because it wasn’t big enough to pose a serious challenge. True, Apple had successfully entered consumer electronics with the iPod, but that was a high-priced product with a fat margin. Apple’s phone would presumably be similarly positioned and not likely to gain a substantial market share. Apple would also have trouble going through telecommunication carriers, which Nokia dominated. Since Nokia was the largest carrier, had the largest market share, and had the best-recognized brand, the leadership team reasoned that they would be able to catch up even if they did miss a beat. What confounded Nokia was the uniqueness of the iPhone and the ferocity with which Apple scaled up, creating a new customer experience and a new high-price, high-margin mass market that superseded the old one. The new market rapidly expanded, and its rate of growth increased.

Elon Musk has created an unexpected and possibly significant uncertainty for the auto industry. Until recently the money the automakers spent developing electric cars basically sustained a mixture of speculation and public relations. But the recent critical and popular success of Musk’s Tesla has gotten their attention. Initially it was considered an outlier, a toy for affluent greenies. But it soon became evident that Musk’s breakthrough in the design and manufacturing of batteries had greater potential. He was able to widen the market and begin scaling up; in 2014 the company was expected to deliver some thirty-five thousand near-luxury cars. Daimler and Toyota have bought Tesla powertrain systems and invested in the company. Will this create a bend in the road for brands in luxury and near-luxury segments—Cadillac, Lincoln, Jaguar, Mercedes Benz, and the upper price models of Volkswagen—in which BMW has taken the lead and is on the attack? Or could it create an even bigger market? In June 2014 Tesla announced that it would make its patents widely available to automakers in the interest of speeding up electric car development around the world. China under President Xi seems to be taking its pollution problems seriously. That market alone could create an electrifying bend in the road for the global auto industry. Automakers everywhere now have a whole new potential business to consider and factor into their plans as either a boon or a threat.

The opportunity in structural uncertainty was summed up for me by G. M. Rao, the chairman of GMR, India’s largest infrastructure business. He once told me that every bend in the road contains a message about a future growth trajectory that someone could explore and exploit if he or she looked at it through a different lens without being controlled by an existing core competency. Since the opportunity is by definition totally new, the instinctive reaction more often than not is “we know nothing about it; it doesn’t fit with our core concept of the business and our core capabilities.” The leaders who succeed because of uncertainty realize that a world in flux creates new possibilities and lowers the entry barriers. They are the attackers. They see clearly, move decisively, and act.

CHAPTER 3    

The Mathematical Corporation: The Algorithmic Revolution and the Rise of the Math House

THE SINGLE GREATEST instrument of change—the one that is creating major uncertainties and opportunities for an ever-growing universe of today’s businesses—is the advancement of the mathematical tools called algorithms and their related sophisticated software. Never before has so much mental power been computerized and made available to so many—power to deconstruct and predict patterns and changes in everything from consumer behavior and human health to the maintenance requirements and operating lifetimes of industrial machinery. In combination with other technological factors, algorithms are dramatically changing both the structure of the global economy and the lifestyles of individual people. (The others include digitization, the Internet, broadband mobility, sensors, and faster and cheaper-by-the-day data-crunching abilities.)