Creating Value: Nilofer Merchant

Nilofer Merchant teaches innovation at Stanford and Santa Clara Universities. In a meteoric 20-year career, Merchant has gone from being an administrator to becoming a CEO and then board member of a NASDAQ-traded company. Along the way she has gathered monikers such as “the Jane Bond of Innovation” for her ability to guide Fortune 500 and start-up companies. She is the author two best-selling books: The New How (2010); and 11 Rules for Creating Value in the #SocialEra (2012). She won the 2013 Thinkers50 Future Thinker Award.

When she spoke with Thinkers50 co-founder Des Dearlove, Nilofer began by talking about some of her formative business experiences:

One of the experiences I had really early in my career was working with Steve Jobs. I did a presentation to him and he told me that what I was doing was going to be eliminated. It wasn’t necessary, it wasn’t even part of the picture, he said, and I was looking at him, and thinking, “you are out of your mind” because, at that time it was delivering something like 20 percent of the total revenues of Apple, and 47 percent of the profit of the company.

Was he right?

He was. Dead right. That’s given me so much perspective because it’s so easy to keep thinking that the base of revenue is what you need to protect.  So if anything, I now have the opposite instinct, which is as soon as you know you’re succeeding you have to figure out how also begin to build the next thing.

You can’t tell how quickly “the future” is going to happen. But what you can know is that you need to go in that direction because all the things that you try and fail with in the meantime teaches you how to get it right when the time is right.  So I always talk about building the innovation muscles so that you can be ready for that moment you need to sprint.

Rita McGrath from Columbia Business School talks about the end of sustainable competitive advantage and the importance of being able to close things down as well as start things up. Do you agree? 

I think she’s onto something.  I reviewed her manuscript probably two years ago now and she hadn’t named it as the End of Competitive Advantage at that point. I wrote Rita a note to say the first thing you actually have to say is clarify what you’re saying, which is it’s the end of competitive advantage, and complete that thought for business leaders, because that’s what’s going to help it land with people. The old operating rules are no longer the right operating rules. But, yeah, I think she is right. You need to be able to wind things down.  Or, how know how to transition, maybe. But mostly you need to know how do you invest in the future?

Companies don’t usually shut down profitable operations in order to migrate — that’s something new? 

I’ve been doing all this work in boardrooms now for 15 years or so – and one of the things I started noticing was that all of them ask the exact same question. How much do I budget for the future development of the business.  So if I’m wanting to go faster in the new space, am I allocating 5 percent, am I allocating 10, or 15 percent? Give me a high, medium, low budget range so I can start thinking, at least with dollars and allocation of resources, how to start thinking about what’s next.

Is there a correct answer to that question?

I used to show leaders indexes of companies across industries, and what they were doing because quite often we had a backchannel view to what equivalent companies were doing. So I would share these guys are investing about seven, these guys are investing about 15, and five years ago, what they were investing was this.

So we could show them a spectrum, and that helped them act,  to invest in the right direction. It usually turned out that the right number was around 10 or 15 percent.  And if you invested more, you actually didn’t get any more because the organization couldn’t handle it. Inventing the future is always as much about change management than anything else, and so even if you threw more money at it, you couldn’t make it go any faster.

You are increasingly well known as a business thinker, but you are also a practitioner. Your bio says you have personally launched more than 100 products, which netted $18 billion.  Can you tell us about that part of your career, and some of the products you were involved in?

Sure.  So let’s go back to the Apple story. I was involved in pricing Apple products in different parts of the marketing mix at a relatively early point in my career. Then at one point I was asked to solve a problem that the business division had. The GM of the Americas at that time just handed me a spreadsheet, and apparently, in retrospect, he’d been trying to hand it to virtually everybody. But he just tagged me and I didn’t know enough to run.

He said, there’s one part of the business that is about 50 percent margin right now, and only making a few million dollars. But if we could get this part to grow it could actually sustain us with everything else, including the decline of every other part of the business.  And he said, do you think you can help me solve this problem?  And with the audacity of a 24, 25-year-old, not knowing any better, I said, sure, I can help you with that problem.

And I went in to my boss and said I have no idea what I just picked up, and he said, no, you don’t.  And I said well I’ll figure it out.  And that product line turned out to be the first 180 million of that 18 billion. This was in the early days of the web, basically pre-web, and it was figuring out how to market the Apple server product  — getting people to think about how to buy it.

All I did was figure out why was it currently selling well, and then was there a secret to that that we could duplicate that success. That turned out to be hugely successful, and got written up in the newspapers.

What happened next?

From Apple I went to a little company called Golive, and Golive was the first web offering software that did HTML. We got that company successfully sold to Adobe, and I think that was a total of $4 million, and you can see how they show up in small increments.

Then I ran the North America division of Autodesk, and grew that, and that was in the $300 million range.

And then from that point forward I worked in consulting, going into teams that were struggling with shipping a product.  Either because the price was wrong, or the value proposition was wrong, or they didn’t know who the customer was, or some part of the total business proposition was just so broken that they were missing their target.  And so I’ve had a chance to do that, including Adobe’s creative suite products, actually designing what that would look like as a configuration and defining a value proposition.

And the funny thing is that Adobe fought that one to its end, saying nobody will buy all the stuff all together.  And I told them actually you have a bunch of incredibly loyal customers who will.  And you could make it easier for them to choose you.

I’ve really liked working with teams, not just the very, very top executive level, but teams actually building a product and figuring out who that customer is, and figuring out how to ship it. So at some point I realized I was good at figuring out what was broken, pretty fast, locking in to what was missing, listening to the answers to three questions, six questions.  My team used to privately say it was like watching Name That Tune, because I could figure out the problem in five questions, four questions, three questions. Then it’s just about designing a solution so that business model was complete enough, thorough and innovative enough that it will allow the product to go out in the market successfully.

Let’s talk about your book 11 Rules for Creating Value in the Social Era? What are the big ideas in that book?

The genesis of the book is telling. I’d gone to a board meeting where I was sitting in as a guest for a Fortune 100 company to see if I wanted to join that board. I heard the Chairman of the Board talking about how they needed to protect their existing market, how they needed to build a bigger moat around it, how they needed to manage the efficiency of the value chain.

I was sitting there cringing.  Everything they were saying seemed so viscerally wrong to me because I don’t think that any customer is at the end of some value chain any more.  That construct is a very linear one and diminishes where value can actually come from. I came back to my desk wanting to write this email, a personal thank you for the opportunity to join the board, but explaining I wouldn’t be joining because I didn’t think it was a good match.

But the other emotion was that I really wanted to help them.  With my background in consulting being what it is, I thought let me see if I can actually help you see something that you can’t see. I wanted to simply send them something someone else had written.  I came back and I looked around and I looked at who else could have written this, and where is the argument, and I honestly couldn’t find it.  And it was like, gosh, it seems so obvious.

So then I reached out to some other business thinkers — friends whom I thought, , would be the right people who would have seen it, or written it, and said this argument that customers are as much a part of the co-creation process, not just a recipient, and that the value chain construct is one of the past. Connected individuals can now connect to each other without the need for a large corporation to orchestrate their activities. Networks allow you to do what once only large centralized organizations could. If that’s the case, then what is the point of all these existing organizations? Networks change the nature of competition by changing who you are competing with.

And everyone was shaking their heads. No one’s written that, they said, but you should. I shook it off for two months, and then one day, in this diatribe moment, I wrote a 4,000 word initial take of what this argument was, and I sent it to my editor over at Harvard Business Review, and she said “oh my gosh, we have to get this in the magazine right away”.

And I said whoa, this is the first time I’ve even had the thought this clearly. How about we blog it?  And that’s what we did.

What was the idea behind it?

There are a few nuggets.  The first point is that social is more than just media. It is an opportunity that cuts across every part of the business model. You can use it to build a product, ship a product, design a product. Every possible thing that you do in a business can be social. I’ve seen it in different parts. No one’s actually integrated them across eight functional areas of a business, but I’ve seen it work.  That’s one big step forward.

And then the idea that’s controversial, that got me known, was the argument about why Michael Porter’s theories are no longer working. That was the headline of the piece.  What I argue is since connected individuals can now do what only large organizations could do before, it challenges two parts of fundamental management theory.  One is the thesis of the firm — Ronald Coase’s original thesis of the firm and why it actually exists.  And the other one is the notion of competitive advantage.

As information and knowledge flows are pervasive, it becomes impossible to protect business by hoarding information. The challenge going forward is to figure out how do you actually expose that information and allow other people to build something with you.  Advantages then happen because people want to work with you and solve problems faster, through their ability to scan the environment and change it.

So the Social Era book’s thesis was this idea of connected individuals being able to do what only centralized organizations could do before. The implication of that is that it changes what you do, how you do it, and then what form it takes – which changes the basis of how you compete.

Is this the death knell of large organizations? Are big corporations like GE obsolete in this new world? 

I know a lot of people would like to say they are. I don’t think so.

People say old companies can’t innovate, and small companies are more inventive. That argument is both old and wrong. Joseph Schumpeter, the noted economist, said — in, I believe it was 1909 — that small companies were more inventive than large ones. But then, in 1942, Schumpeter reversed himself and argued that big companies had more ability and incentive to invest in new products. A look at any performance measure shows that innovation can come from either size, and that both arguments are oversimplifications.

The key for every firm — regardless of size — is to figure out how to consistently create value in a demanding, ever-changing market. That is hard no matter what size you are, no matter what industry you’re in.

What I will say is that traditional organizations will have a very different basis.  Let me give you an example. Years ago, IBM started doing something that I found truly profound, especially when I compared it to other companies like HP that didn’t do it. IBM started saying our expertise isn’t just what we ship, it isn’t just what we build, it isn’t just what we create all by ourselves. We could actually allow other people to shape that.

IBM’s Smarter Planet initiative started off as an effort to say “we should do something in the green space but we don’t know what”.  They asked the questions to participants really broadly, drawing on talent that was outside the firm. They were eliminating the perimeter of the firm, not trying to help with an existing problem that was defined, but saying what problems should we solve?

So they changed their perspective — the parameter of the question was open, and who could participate in solving that problem was also open.  And with that Smarter Planet is now making a pretty sizeable contribution to the business. Now, is that enough to sustain an entire business?  No, but I think it’s indicative of how social can work to fuel new innovations.

Which is to say within five years you can achieve a lot. So let’s do another example. You can’t do it today, but if – in five years or 10 years — I can take a picture of a jet engine, and use a 3D printer type thing to manufacture it. I no longer need to be inside your plant to know what that engine is. So, if I can take a picture of some functional thing and then get it to an engineer and have it produced. Then what is GE’s role in “making” that thing?  It isn’t just about their ability to manufacture.  It is about their ability to design it, and their know-how, and their ability to ask the right questions to customers.

So I think the key shift isn’t what you make, but how you make it; and who you ask the right questions to, to inform what you’re thinking.  IBM is one of the best at understanding how to solve really complex problems, so of course you would continue going to them, because they’ve done it before.  And that’s their advantage. But it’s not about defending a turf, or even saying we’re going to keep you out. It’s much more about IBM or GE saying come and build something with me.

What you’re describing is co-creation as a competitive advantage. It’s the opposite of building barriers to entry, it’s the ability to invite people in?

Yes, instead of all the stuff going on inside your building, in your architecture, and with a big moat around it, and saying please don’t come here because this is ours, this is our hill that we’ve created and we’re the castle on top of the hill.  It’s much more like an open playground, where we invite a whole bunch of people to play, and then see what we can create together.  And what do we do after we have created something together?  What do we do with all that stuff? How do we sell it? How do we make money? All those other questions can come.  And then you draw on talent that you couldn’t get any other way.  And that’s the advantage.

So we’re talking about a new model where we see organizations as social systems. You’re talking about them competing with each other on the basis of how social they are? 

I’m talking about moving from a closed system — closed meaning thinking about things as ‘us versus them’ — to an open system that says we allow you to play in terms of what we create, what questions we’re asking, and who we invite. Who else could be involved in helping us solve these problems, or creating this opportunity?

You wrote a Harvard Business Review article When TED lost control of the crowd. That’s a very interesting example of this social dimension at work. So talk us through what happened with TED and the lessons from that. 

TED invited many people to give talks and run events using their brand. But some of what was co-created wasn’t quite in line with what TED should want in the marketplace. So what should they do? Instead of taking the person who was responsible behind the woodshed and plugging him, or her, they actually made it a public social act of how do we solve this problem.

So, they started by saying yes, there’s a problem, and then to everyone who had been a critic, they said how would you help us solve it?  And they started co-opting even their worst critics into the process.

And what was interesting was the social dynamic. To begin with people said “just tell us what you want us to do to fix the problem”.   But TED said we’re not going to tell you the specifics of what to do because all that teaches you is to come back and ask more questions. Actually we’re going to celebrate the things that work and show you. So we’re going to amplify and reflect back to you what is good. We’re going to show you what’s good and reward the best of the best, so you can see an example of what it looks like, and you can duplicate that example.

Throughout that whole process people kept trying to throw the ball back to TED.  And this is the real dilemma of social leadership. There are parallels with being a parent. If you are a parent you will recognize this little behavior. I remember when I asked my son to set the dinner table. He came back with questions, I don’t know, 100 times, over the course of six months. Do I have to put water on the table? And do I have to put the fork in this spot? So he kept asking specific questions.

A big part of me wanted to say this is not worth it; I’ll just put the fork down myself.  I wanted to stop answering the questions.  But it was better to say, you figure it out. What did you do yesterday?  And how would you learn this?  What Google video could he pull up? Why don’t you ask other people what a good place setting looks like?  And I just kept throwing the ball back to him, so the learning system was happening inside him, and didn’t rely on me.  I was teaching him to learn and making him stronger in the process.

And TED did exactly the same thing.  Every time somebody said hey, can you guys just stipulate stuff TED said it’s not my problem.  In other words, this is not TED Corporate’s problem.  This is our collective problem, and we’re going to solve it together, and then you guys are going to reinforce it and enforce it amongst yourselves, so that we own it together

So this is a different style of leadership – social leadership?

Yes, it’s social leadership. It’s like the ball stays in the court, being run by the team.  And then you just teach them how to do better plays so they can start to get higher and higher performance professionally. Community managers start then co-lead with you, and they start to establish the standard, and manage the standard, and raise the standard.  Those are ways in which sometimes we fail the test when we’re switching over to a different model of leadership. We think oh, well, they can’t do it.

The reason they keep coming back to me is because they can’t do it so I’d better go back to that sort of more directed approach. But really it’s just a little social test to give them more tools, show them what good looks like. Reward that behavior, encourage them to learn amongst themselves, because that’s the principle you’re trying to get duplicated so it scales without you as a leader having to do it for them.

What are the skills required to lead a crowd in that way? It sounds time consuming?

It’s both time consuming and not time consuming because what corporate leaders are largely doing today is inefficient and time consuming in its own way.  Things are going up and down a chain of command, being rolled up, vetted, rolled up again, vetted some more, approved by someone, rolled back down, and by the time it gets back the situation may have changed.  And leaders are only trying to go faster and faster in that corporate hierarchical structure because they can’t keep up with the rate of market change.

Personally, as a leader I don’t really want to spend that much time approving or disapproving things, and I don’t think you do either.  It’s a very slow and tiring process.  But how about I share with you in some public forums the criteria by which we want to operate or what is the horizon that we’re all aiming for?  You guys figure it out.  You’re smart, intelligent people — figure it out.  Then as a leader I’ve figured out how to get all the smarts solving problems and identifying opportunities.

And the example I’ve seen that I think is a good one is Google. Google has an interweb where they post strategies at the very top levels, division-wide and so on.  And people ask questions, and critique the company’s strategy. In fact there have been some comments like, “I hate this strategy”. People feel comfortable to say anything and everything in this forum.

Questions get asked, conversations end up happening, clarity gets discovered. . It’s that kind of thing. Then when a product manager wants to do this, or that the leader asks, “how does this fit with the strategy?” So the burden you notice is on that one question. It isn’t on the leader to determine whether an idea matches the strategy. The burden is on the thousand product managers to figure out what fits.

And of course, the leader’s role then is to ask more questions, to advise, to teach, and so it’s different.  I’m not sure it’s harder, but it’s definitely different.  And in the long run you can have more participants actually using their brainpower.

So ultimately, you’re saying it’s a better way — it’s going to be a more productive way of reaching solutions? 

For sure. The reason I wrote the TED article is because this is what modern leadership looks like.  TED Corporate now hosts three events a year with a staff, I think, they’re up to 120 people.  And they have to handle corporate sponsorships and so on. But over 6,000 events have happened on their behalf, curating tons of ideas that matter, finding the best leaders. How could such a small organization do 6,000 events in a conventional business way?  You couldn’t possibly tap into the talent pool, and the creativity that someone in Houston, Texas or a slum outside of Nairobi, in Kenya.

So what I’m saying is openness leads to scale, openness leads to new ideas I couldn’t have thought of by myself. And, by the way, even if 120 people in America could come up with all those ideas they would be coming out of a largely American-centric point of view rather than a global point of view.  So how do we become an organization where a great idea, regardless of its origin, matters?  And how do you allow that filtering process?

Is this a fundamental shift in human organization?  Does the new technology allow us to create a social process that was impossible before? Does this mark a watershed for humankind?  Are we going to do things differently? 

I think we are, and I think we want to go there.  if you think back to a couple of hundred years ago, we had artisan type work. You were a book writer, or a craftsman and your efficiency at reaching scale was poor. So we moved into the industrial era where we got efficiency, but we lost the artisan talent that each of us could bring.

And now networks mean companies can actually allow individual perspective and creativity and individual talent to come back, but without losing the ability to have scale. I think that’s where we are with this tectonic shift. It’s something that all human beings have and desire – the ability to have their ideas and creativity matter. They want to have their own art show up in the world.  They want to use and showcase their individual talents – whatever they are.

Where are we now with this social revolution?  How far into it are we, do we have critical mass?

We’re probably ten years in. We’ve had ten years with enough cognitive surplus, and with the ability to do this connectivity stuff. But probably only in the last three can you see something where you can make money at it. You can organize pretty efficiently all that stuff, so that’s why TED is an interesting case.

There are a couple of other examples of organizations.  But we’re at a very early stage, which is why my Social Era book is a hypothesis. I said I can’t prove this to you yet because there’s not enough evidence, but I’m going to use the weak signal to suggest there’s a directional shift. The question is:  when does everyone do this?

Bill Gates said with the impact of all the new technology we overestimate the change that will occur in next two years, and underestimate the change that will occur in the next ten. . And I think that’s true, so we shouldn’t let ourselves be lulled into inaction by saying it’s far away still.  But building it into a business model, and building it into really viable leadership constructs could take 20 years for us to see the results.

Do you see anything that could derail it, or is this inevitable now?

Things could definitely derail it.  There are a couple of things that you can point to right now that nobody knows the answer to.  One is that way too many people are working for free.  The idea that all of us can do the work together, blah, blah, blah, it’s really interesting.  The dark side of this is if you look at those 6,000 people who created TED events most of them didn’t earn any money from that.

It gave them more media attention, gave them maybe more impact, all those things, yes, but sometimes people have got to buy shoes and feed the kids. We have to wrap the economic balance point around that, and until that’s fixed I think we’re going to continue to really struggle.  And then the other one is that everyone tends to look at these social initiatives and ask why they failed. Why did Occupy Wall Street fail? Why did the Arab Spring fail?

Some people will say the Arab Spring succeeded.  But I think we had one dictator and now we have a different one. So we didn’t really see a big change in allowing people’s voices to come forward and create a new result. And so the question is about whether we can really affect change, tectonic change, not just the appearance of change. How can we get to outcomes we want, not just feel better for a while. There are very few signals that we’re there yet.

And that’s the area where we need to see more evidence in order to make forward motion.

So the managers of the world, reading this interview, what should they take away from your thinking, from your ideas? 

It’s time to get ready. I might only get 50 percent of these futuristic ideas right, but I couldn’t tell you which 50 percent.  But directionally, this is the horizon to go towards. And I’d have you open up your thinking in two directions.

The first one is how do you stop thinking about your organization as a closed system. How do you invite others in? Whether it’s a customer or a partner or whatever.  How do you break down those silos within and then ultimately your organization to allow all talent to play? Regardless of where people are in the world, regardless of whether or not they work for you. So openness around talent is one thing.

And the second challenge is to stop thinking about what you’re producing as a thing.  You make a thing and you sell a thing is old-school.  Instead, you have to start thinking more about how you enable many other participants to start building things with you.  And so you move from IBM makes servers, to IBM knows how to make servers and has lots of other useful knowledge and expertise, and it doesn’t matter who makes the actual thing of servers or other things.

IBM becomes more powerful, because they can be the glue. They can ask the right questions, they can solve different problems.  So think about how to build more of a platform mentality rather than a product mentality.

Those two vectors seem to me to be the most important. All growth and performance can be tied to opening up those two vectors, and moving from transactional ways of selling things to relational and ultimately connected way of selling things, where it’s not even about did I make it or you make it.

What advice would you give your ten-year-old son who has his whole career ahead of them and is trying to find a place in the world?

He’s going to have a chance to think not just about how to fit into an existing structure, but how to create a structure that works for him, that’s right for him.  We’re going to think less about having a job and more about a portfolio of things that we are interested in doing, and figuring out how you put together the economics behind that.

That’s one thing. And the second is to understand that who you work with isn’t limited by geography. It isn’t limited by who you already know.  You can actually start working with strangers and they can start helping you solve problems.  And if you know how to find them, and you know how to work with them, and how to negotiate that framework of what is our shared purpose. Kids growing up today do this instinctively. So, actually my son probably teaches me as much about collaboration as I can teach him.