Gary Hamel Interview

2011 Ranking: #15

Gary Hamel has been labelled “the world’s reigning strategy guru” and “the most influential thinker on strategy in the Western world”. He calls for radical innovation in business, telling companies that they must continually reinvent themselves, not just at times of crisis. His landmark book, co-authored with C. K. Prahalad, Competing for the Future, was BusinessWeek’s book of the year in 1995. Its 2000 sequel, Leading the Revolution, was also a bestseller.

Hamel is a founder of Strategos, an international consulting firm, director of the Woodside Institute, a non-profit research organization, and a visiting professor at London Business School.

What is the basis of your latest thinking?

The basic proposition of my recent work is that most of the things which moved earnings and share prices upwards during the last decade have reached their arithmetic limit.

One hundred years from now people will look back at the last decade, especially the last half of the decade, as an economic aberration. It was a time when a variety of forces conspired together positively to create a buoyant economic climate.

First, there was huge growth in technology and IT spending. Go back to 1990 and US companies invested about 19% of their capital expenditure on technology. By 2000 they were spending 59%. Capital spending tripled. It was the longest capital spending boom in history. That fuelled the share prices of IBM, Cisco and Sun and everyone else in the technology sector. That’s not going to happen again. Capital spending is not going to triple over the next decade.

The second positive force was an unprecedented attack on inefficiency. Over the last decade we have seen reengineering, restructuring, downsizing, enterprise resource planning and customer relationship management. All of these things, whatever their names, were essentially concerned with doing more with less. There’s a lot of data which says that companies now have reached the point of diminishing returns in their efficiency programs. They are having to work harder and harder.

The third thing was an orgy of mergers and acquisitions (M&As). In 1990 there was roughly $600 billion worth of global M&As. There were $3.5 trillion by the end of the decade. If M&As had continued to grow at that pace there would have been one company left in the US.

It was possible for executives to rely on a rising economic tide on which to float their boat. The tide is now receding. There is no evidence that somehow substantial economic expansion is going to rescue the day.

So you take a pessimistic view on the prospects for economic growth?

I am not pessimistic on growth overall, but right now most companies don’t have any strategy which goes beyond retrenchment. Suddenly, timidity is in fashion once again. Retrenchment doesn’t buy you growth, it doesn’t buy you a future. At best it buys you time.

There is enormous enthusiasm for moving back to basics. You can’t argue with that at one level. Of course, you need to focus on the basics. The dilemma is most companies don’t have a lot of options. Most companies, for example, can’t grow revenues by selling the same things in the same old way to the same customers.

One of the huge blindspots for a lot of managers is that they’ve forgotten that productivity has two elements – the efficiency with which you use your inputs, your labor and your capital, and the value placed on your output. Executives know a lot about the efficiency side of the equation but not about their output.

Despite all the consolidation in the global car industry over recent years, the most profitable car makers are BMW and Porsche and they are couple of the smallest. They may not have the global purchasing efficiencies of GM or Ford, but they create things people love.

On the cost side most companies have reached the point of diminishing returns. But if you look at companies which are doing best in difficult times, companies like Dell, Wal-Mart, Jet Blue, and Ryanair, all brought radical innovation to the cost structure. Their costs are not five or ten per cent lower but 50% or 80%.

Are you saying that retrenchment simply won’t lead to growth?

My argument is the more difficult the economic times, the more one is tempted to retrench, the more radical innovation becomes the only way forwards. In a discontinuous world, only radical innovation will create new wealth.

At one level, executives are getting that message. They know that they can’t do the same things. But there is a huge gap between the rhetoric and the reality.
CEOs will say that they need to innovate and put innovation as one of their top two or three priorities. But if you go down a few levels in the organization and talk to mid-level employees you should ask have you been trained in innovation? What is the process you plug into if you have a new idea? How quickly can you locate talent to push ideas forward? Ask these questions and it’s obvious that most companies have not institutionalized innovation in a meaningful way. Innovation is a ghetto. It is seen as something for a few people in product development, R&D or the corporate business development function. It is not seen as the responsibility of every single employee every single day. Most companies haven’t even begun to either unleash or monetize the imagination which exists.

It is the same situation as around 1970 in terms of quality. People knew that quality was important but didn’t know the processes or systems which could enable this to happen. All the processes and systems – pareto analysis, quality circles and so on — later known as total quality management, were being built at the time. Executives in the west had very little knowledge of them and didn’t know what to do.

The question I have been asking is how do you do for innovation what W Edwards Deming and others did for quality?

What is the pay-off from better understanding innovation?

Innovation drives wealth creation. There’s no other conclusion you can reach.

A product advantage can come and go but if you commit early to building a complex and deeply embedded capability it is very difficult to catch up. Companies which commit themselves to innovation – like Whirlpool, Cemex, Shell and a few others – are going to have a profound advantage. It might not be evident right away but once you get a lead it is difficult for others to catch up. Over the last 40 years western car makers haven’t recaptured even a single point of market share from their Japanese competitors. The western car industry has continued to lose market share.

How can companies develop the capability to innovate?

Making innovation a real capability requires not an overlay of a few small adjustments, it requires a fundamental re-think of your most basic business principles. Today, the goal of becoming incrementally better is engrained in our thinking, in our language, in our reward mechanisms and everything we do. Innovation is seen as an exceptional thing which happens once in a while, almost by accident, on the fringe. To change that is not easy.

Think of the legacy of the industrial age – hierarchy, control, replication, quality. These are hugely important but in many ways they are toxic to the process of innovation and creativity, experimentation, imagination, self-organization.

We haven’t really challenged the primacy of optimisation and incremental improvement. Fundamentally, innovation can’t be at the edge. Innovation has to be central to the purpose of organizations. We have to systematically train people in new ways of thinking. We have to create new metrics. Most of the metrics companies use – ROI, EVA and so on – push us into thinking simply about incremental improvements. We still have a very deep belief in management processes which are the antithesis of innovation.
One of them is that alignment is always a virtue – everyone reading from the same page, all the wood behind the arrow, whatever metaphor you use. Perfect alignment is death.

In a world of enormous change the scope for experimentation inside your company has to match the scope for experimentation outside. We have to re-engineer management processes to minimise the time between an idea and wealth creation. It’s not the supply chain which needs shortening and automating, it’s the innovation chain which needs shortening and automating.

What needs to happen now?

Companies shouldn’t mistake what happened in the 1990s as real innovation. The 1990s were a product of the deal makers and the dream merchants.

Three principles are the foundation for trying to move forward: First, radical innovation: in an increasingly non-linear world only non-linear ideas create wealth. Innovation is the only insurance against irrelevance. Second, requisite variety. Is there scope for experimentation within the company? Is there a willingness to make mistakes? Most organizations have way too little strategic experimentation. Third, resource attraction which is different from resource allocation. We need to learn from markets. Markets out perform hierarchies every time. Most organizations today look a whole lot more like the Soviet Union than we would like to admit.