July 22nd 2019

CRFCast – HR’s Role in Creating the Conditions for Innovation with Howard Yu

We live in a world where everything can be copied, and competitive advantage can be short-lived. What do organisations that sustain high performance over decades do differently? And how can HR create the conditions for long-term success? We discuss with IMD Professor Howard Yu, author of Leap: How to Thrive in A World Where Everything Can be Copied.

Episode Transcript

Gillian Pillans [00:00:03] You're listening to the CRF cast where we explore research we've been working on here at the Corporate Research Forum, and we discuss the latest thinking in strategic HR topics with academics, practitioners and leading experts in the field. I'm Gillian Pillans, research director at CRF. You can explore the full podcast archive and subscribe for updates by searching CRF cast on iTunes or Spotify.

You can also find more about CRF and access all our podcasts and other research materials at www.crforum.co.uk.

My guest on today's CRFcast is Professor Howard Yu of IMD, who's also the author of Leap How to Thrive in a World Where Everything Can Be Copied. We'll discuss his research into what makes companies maintain competitive advantage over decades or even hundreds of years. We'll look at how companies can build the capacity to unlock entirely new lines of business by being prepared to leap into new knowledge disciplines. We'll discuss the role HR can play in helping organisations build this capability.

Joining me today is Howard Yu, who's the Laker professor of management and innovation at IMD welcome, Howard. Thanks for joining us.

Howard Yu [00:01:26] Great to be here.

Gillian Pillans [00:01:27] So you've just published your book Leap, which looks at the evolving nature of competition and innovation. So can we just start by briefly discussing some of the key themes? And I'd like to start with talking about competition. So how the nature of competition is changing. How would you summarise the key messages in terms of the business context and what we're seeing happen today?

Howard Yu [00:01:48] The book really started off with a repeat question as an executive raised to me, and that is if they look across the world, inevitably they find late comers, sort of surpass pioneering company and executive come play my product is getting more ties is harder and harder to differentiate a product in the marketplace. There's pricing pressure. The thrust is I want to understand how to early pioneering company can survive, thrive and prosper, not just for the next quarter, but over decades and even centuries. Because we are truly live living in a strange world that the average lifespan of a Fortune 500 company dropped frames every five years back in the 50s. Two days to 15 years. So the pressure to perform as a firm is going higher and higher. So that becomes a core thrust of the research of the book based on how do company can maintain their competitive advantage over centuries. So that's the core contacts of the book.

Gillian Pillans [00:02:55] And can you briefly summarize the conclusions that you reach straight into the common characteristics of these organisations that manage to maintain that long term competitive advantage?

Howard Yu [00:03:07] Yeah, what I discover is for industry and even companies, whether they're high tech or mundane, consumer goods company, for example, in order for them to really stay on the long haul, inevitably at some point they need to move from one knowledge discipline to the next and then to the next is no longer just about doing slightly better and faster than your competitor, because no matter what kind of product features a solution you provide, you can copy overnight. However, even organization can really move away from the foundational knowledge that was spewed on from the past and move to a new knowledge discipline. Then competition would find it rather hard to catch up. For example, if you're looking at a pharmaceutical industry, it's not so much around just discovering new drugs, but the way drugs are being discover fundamentally shift over centuries from organic chemistry to microbiology to two days, of course, genomics. So as a result, you see early pioneer from Pfizer to JNJ to Novartis to Roche. They have been around for centuries and yet they're still worldwide leaders. Unlike automotive or personal computer or mobile phone or wind turbine or these industries sort of subject to lay come a pressure. So is this important is that companies need to leap to the next knowledge frontier in order to thrive in a world when everything can be copied.

Gillian Pillans [00:04:42] And so that's consistent across different industries. The characteristics that you would be looking for would be the same.

Howard Yu [00:04:49] Yeah. That's interesting that you brought up because pharmaceutical industry, of course, people would say always very high taxes, FDA, a regulation, that's pattern and so on. But in my research, I also looking at some of the more mundane industries, such as consumer packaged goods and disposable diapers and laundry detergent. And if you think for a moment, Procter and Gamble is kind of interesting case example that is built on for the last 150 years. So a personal computer such as HP and Dell are disrupted by Lenovo and Samsung. PMG should have no way to survive. But they did. Of course, they're facing some challenge going forward with e-commerce. But at least in the past, what it did is it move away from mechanical engineering based on large scale manufacturing, just consumer psychology, a complete new discipline et of turning it around a century to understand how can we run advertising in even more effective. And then finally, is organic chemistry launching the first emphatic detergent in a world? That's the hybrid. And so what we see even for Procter and Gamble, this hundred and fifty used GI and is this understanding of leap from one knowledge discipline to the next and then to the next. Had they stay as mechanical engineering for a whole time, just booting big factory, they would have such a hard time competing against the Chinese, for example. So. So it does apply. Across all industries.

Gillian Pillans [00:06:19] Okay, so thinking about the organisational implications and how we can design organisations that have capacity to leak. Yeah. I wonder what your research discovered around, you know, how can we how can we create the infrastructure within our organisations to be able to do that?

Howard Yu [00:06:37] That's a great question because what we've seen is just a historical example. What it meant is going forward, companies do need to leap forward, if you will. And so two areas. One is to identify what the seismic shift around once industry so that executive can really capitalize the most out of these abundant opportunity and buffer your organisation against the worse. So that's number one identified in after all, in my home sector. And then second is, just like you said, we need to create a space so that the organisation can actually make the session a rather important investment based on evidence, not just gut feeling, gut feeling. It's not enough courage, just not enough. And certainly this, you know, big man theory doesn't hold anymore. So it does require a new type of organisational structures and also capital agenda to allow the organization to scale up some of these early success at the time. It could looks rather disruptive as well.

Gillian Pillans [00:07:45] I wonder how much of those historical examples are kind of serendipity in hindsight and which would be much more difficult to replicate or whether there are ways of creating those conditions to allow that that sort of thinking to emerge.

Howard Yu [00:08:02] Yeah. So to prevent from a research angle, to prevent, you know, sort of hindsight biases, what you want is to identify what exactly are some of these managerial activities. So going beyond just quantitative research, doing correlation and survey, but really goes deep into these company, what exactly have happened? So a lot of the time what we saw is when a company is finally successful in leap to a new new knowledge discipline, it goes beyond the traditional financial analysis. There's something that really understand based on evidence that this would represent a new way of how our company is going to work going forward. And a lot of money doesn't matter. I'll give you a very concrete example. For example, when Procter and Gamble about to launch the world's first synthetic detergent back in the 1960s, in the wake of the launch of this Thai brand, a number of organic hammer's trip overnight. So booting up a whole new capabilities. But on the eve of beginning to launch, there's almost a compulsive fear inside a firm because the company or executives are so worried that this new synthetically Turgeon is going to destroy their core business on natural soap. That's the Ivory brand. But as chairman of the board, William Cooper, it's basically said if anybody is going to destroy our natural soap business, it better be PMG ourselves. Exactly like what Steve Jobs has said right. If we don't disrupt ourselves, someone else would. So what I observe over the course of broad history, going back to a comp corporate hog archive is you see similarity or manage your activity.

There are certain activities simply you cannot delegate because these things is very trendy to embrace Lean Start-Up, design thinking you sort of when essentially you put some smart people in a dark room, pour some money in and wonderful things will happen. It doesn't. At some point it does require a senior management team to have the knowledge power to assess where is the progress we are making. Does it make sense for us to switch from an emerging strategy into much more of a deliberate investment mode? It does again pie back to the capital agenda of a corporation organizational structure, but there are task. Senior management teams simply cannot delegate anymore and it doesn't conform to the traditional financial analysis.

Gillian Pillans [00:10:42] Coming up in the second part of the CRF cast, we'll explore how each hour can help create the capacity for innovation within the organisation. I will discuss the common barriers and how they can be overcome. If you're enjoying the CRF cast, please subscribe to our channel by searching for the Corporate Research Forum on iTunes or Spotify. You can sign up to get the latest submissions automatically and to share with your colleagues and leave us a review.

So let's talk about the role of of HR in helping build the capacity to lead. You've talked about the role of senior leaders. And clearly it's not going to happen if you don't if you don't have them driving that agenda. But I wonder what role HR can play to help the organisation along reign.

Howard Yu [00:11:37] I mean, if you're looking at any well-established company, the paradox is most senior leader rise up to where they are because they are very good in delivering business result of the historic or core business of the firm that represent a challenge because they may not have the right mindset or outlook to explore area that are so far out in the future unless somehow they're are exposed her to these new telltale sign out there. So I've seen companies really try to create an environment where cynics Sakata would get exposed to those new trend. But seeing is believing, right? Taking its active al collectively to arrive a share point of view so that today's day to day trade off would actually reflect. What is that long term future going to look like if a company doesn't have a vision, that's an overall prospect. And because senior leaders are so much tie to the quarterly result is really comes down to the actual professional to open up the window of opportunity, letting some light in and and allow organization to have a conversation around what are the inevitable 5, 7 years down the road and how might we do that in practice.

Gillian Pillans [00:12:56] So are there methods that HR professionals could adopt to to create more of that outside perspective?

Howard Yu [00:13:03] Yeah. So I've seen leading organization and the HR function really adopt a slightly different mentality because they have their own organization where they see learning organization as a corporate propaganda. You need certain cost cutting program or we need to drive or high performance for our core businesses. And everything that the corporate communications about is on an organizational point of view that merit a lot. But when it comes down to for long term survival. When we prepare an organization for the long term future in order to lead to the next knowledge discipline, you in fact need business leader to become independent thinkers. So organization, what they do is from inviting external speakers to self organizing certain exploration on expedition to encouraging leaders to go talk to not just your own sector, but company unrelated just to learn from outside. It gives them much more freedom and set the bar. This is an investment from the company to make you becomes a bad strategic thinker. So so is this idea of we no longer just train people in order to conform certain mentality communication going beyond corporate propaganda, but to cultivate an environment, to nurture independent strategic thinkers? It's become more and more important, and I think there is a shift in terms of the role of HR professionalism.

Gillian Pillans [00:14:34] And presumably in terms of the profile of HR professionals we would be looking for, then that's going to be reflected. The idea of independent thinking and taking a more strategic perspective that reflects and in terms of, yes, different reports come into each other, too.

Howard Yu [00:14:48] Yeah, because the demand of the level thinking, which means the HR professionals needs to invest in to the business knowledge itself, is is not so much like the finance functions way or am in a where you acquire a certain body of knowledge within your professional and you can transport from phone to phone to a firm is almost like today's world require HR professional to have a deep understanding about the sectorial dynamic of the industry as well as broad enough to draw a parallel across sectors. Right. So we are looking at people who what rate in a chart professional, but as well as the ability to think strategically. And that's a sweet spot because it char by the design of the job. It doesn't need to be only focusing on the day today. It allows the do thing further down the road. And identifying inside your organization are the early innovator who are an early adopter to create that environment so that they can collaborate to engender that critical mass for change.

Gillian Pillans [00:15:55] You talk about emergent strategy as well. Can you explain what you mean by that, and then again, how the HR unction might help encourage thinking about strategy is an emergent idea.

Howard Yu [00:16:08] The idea of emergent strategies really as a contrast against deliberate strategy, meaning they arrive initiative and activities inside a company is pretty deliberate because you know everything about it. If I were to launch other iteration of my existing product, I know exactly how to make it work. And it's not a rule. It's not just about low investment amounts. Sometimes these incremental activity in terms of capital expenditure could be huge. Like oil and gas exploration, right? But those are the activity the organization know best. There's no need to lead a new strategy to emerge that would be inefficient and ineffective. However, when an organization want to renew itself, you are basically entering a space that the firm doesn't have enough prerequisite knowledge. This is where learning by doing. You cannot mandate is almost like the classic our R and D laboratory. You cannot mandate invention like clockwork because it requires serendipity in order for something big to emerge. So what that means is in nature, our function than one would enter a very interesting conversation off the portfolio of spending. How can we carved out some of these spending in two emergent strategy allowing people to try things out? It doesn't matter if there is no immediate payback, but you also held the entrepreneurial manager accountable for key outcomes, but not profitability, but sort of leading indicator that would indicate early success. At one point we need to scale back. So this is what I mean by emergent strategy. You need to allow doing the final strategy to emerge based on early observation from the market, based on trial and error, where something fail is not. People are incompetent. In fact, if they are capturing some of the learning from the market is the best payback for the organization.

Gillian Pillans [00:18:15] So what about some of the barriers that stop organisations building this capacity to leap? Are there common ones that you've come across? I've talked to other part positive characteristics that one of the things that get in the way that perhaps we need to be mindful of as well.

Howard Yu [00:18:29] Yes, there are twofold that the number one is the fear of cannibalization. This inability or this fear that whatever we are doing may cannibalize our existing sales, usually end up destroying early initiative that looks so prominent for car industry. For the longest time and most recently, v the electric vehicle or represent this dynamic of cannibalizing your hide and traditional car. So that's number one. Second, is this new product or new initiative that represent a foundational knowledge of the firm in terms of initial payback may look small. So for a big company to do something that small and consuming so much time and energy. It may not look very rational, and then a third party is coming down to scaling up disruption. Usually when you're scaling up, the carbon investment will be so huge. You think about Uber is still losing money. You think about has we're still losing money. Quite frankly, if Uber give it has a gift to the Cohen family, the owners of BMW, I'm not sure whether BMW would take it even one at a time. Right now, they're trying to do something just like Uber. So it's a paradox until the senior management team can really develop a share point of view all the way to the deep implication how we think about investment funding, internal and external. We would end up losing a lot of time and energy and effort.

Gillian Pillans [00:20:02] Howard Yu, thank you very much.

Howard Yu [00:20:04] My pleasure to speak to you.

Gillian Pillans [00:20:09] Before we finish, let's take a moment to summarize the key messages of my conversation with coverage, you first. Companies that succeed in remaining competitive over decades share some common characteristics. That's the capacity to move from the foundational knowledge discipline that underpinned their initial success to develop and unlock new knowledge disciplines. This allows them to stay ahead of competitors by opening up entirely new lines of business faster than everyone else. Incremental change is never sufficient for achieving competitive advantage other than in the short term. And companies have to overcome their fear of cannibalizing their existing core business. Building this capacity requires a number of organisational features to be in place first. Leaders who are strong independent strategic thinkers who take time to explore what's going on outside their organisations to identify emergent strategic options. Second, leaders who are prepared to take calculated risks, for example, to cannibalize their existing business or to invest in emerging business opportunities. Third, creating space for exploration within the organisation. Whether that's carving out people's time or creating internal teams to focus on running experiments. Finally, what role can H.R. play in building this capability in the organisation? First, making sure leadership development processes pay sufficient attention to identifying and fostering independent thinkers who might be talented at identifying new business opportunities. Second, taking responsibility for helping business executives who are ordinarily focused on costly deliverables to spend time getting exposed to emerging trends that may impact on the long term success of the organisation. Third, focus on creating a culture that fosters independent strategic thinkers and rewards the right kinds of risk taking. If you're interested in finding out more about hybrids research, his book Leap: How to Thrive in a World Where Everything Could Be Copied is available now.

You've been listening to the CRF cast with me, Gillian Pillans, research director at CRF. You can find out more on our website at www.crforum.co.uk. Follow us on Twitter @C_R_Forum or join the CRF Group on LinkedIn. Bye for now and thanks for listening.

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