Blitzscaling at Scale: Be An Investment Not an Expense
Author: Dr. John Sviokla
Continuation of “Blitzscaling at Scale: Or, Applying Blitzscaling to Large, Post-Founder Corporations”
Part I is HERE
Blitzscaling at Scale: aka Institutional Innovation
We believe at scale innovation in existing enterprises that are no longer led by the founder
needs to consider the four key variables that could enable blitzscaling:
– organization structure
– decision rights
– be an investment, not an expense
– residual claims (e.g. who gets rich if it works?!).
Organization: Operate Apart, but Integrate at the Leadership Level
The best study of breakthrough innovation in large organizations that we know of was published in the Harvard Business Review article The Ambidextrous Organization. This wonderful title gave a memorable name to the core responsibility of any executive at an established firm – run the existing business (e.g. one hand) while growing for the future (e.g. the other hand). They look at three organization structures across dozens of companies to discover which works best to successful grow large innovation efforts inside existing organizations:
- within the operating unit
- a separate unit with separate management reporting to the CEO directly;
- an operating division which had its own ability to source, grow, etc, but the leader was part of the firm’s overall management team.
The third option – was the only structure that lead to success and it did so 90% (check) of the firms in their sample. We believe that this combination of integration with the core through leadership but operational, resource and business model design flexibility, is vital to blitzscaling – because a key part of blitzscaling is being able to access new forms of scalable talent, infrastructure, market access, design, and to do it at a pace that is far faster than the month to month, quarter to quarter metronome of a mature organization. Customer adoption is usually on a different time scale – happening faster or slower than you expect.
W.W. Grainger did this arrangement when the venerable industrial distributor set up Grainger.com. Their leader was part of the Grainger management team, but they had wide latitude on suppliers, management process, talent, etc. As one executive put it – at Grainger the dress code is 25 pages, at Grainger.com it was two words: wear clothes. After it was large and successful, it was integrated into the core business.
Decision Rights: Avoid Death by a Thousand Paper Cuts
There was a fantastic shop one of us used to frequent called the Low Fat, No Fat Café. It was started by health enthusiasts, in particular, bodybuilders. It had perfectly cooked slabs of egg whites, steamed broccoli, bison meatballs, turkey tips, the world’s best air fries and more. In short, it was a smorgasbord of healthy protein, and complex carbohydrates with tons of free fresh, well-filtered water. All of this was served to you by one or more giant bodybuilders wearing skin-tight tee shirts or oversized sweats, some with the rust/orange glow of tanning booths, which only added to the ambiance. Even if you were 30 pounds overweight, you felt healthier eating there.
They were approached by an investor who wanted to scale the business by franchising. In designing the franchise they reviewed the menu and decided that they needed to trim the menu to include things that were a little more shelf stable, so they substituted black beans for air fries, then they found that getting egg whites right was a little tricky, so they began to use egg substitutes, and small compromise after small compromise – including charging for bottled water as a way to increase revenues. Of course, they could no longer attract the bodybuilders and they launched a franchise which not only did not serve the core audience but had lost its soul. They lasted less than a year and the original store never re-opened.
This was an investor story, but we have personally witnessed idea after idea which dies through a thousand paper cuts. Small changes are made on the supplier to match an existing supply chain, or a design to be more compatible with existing manufacturing, or different promotion to work better with existing channel partners, or more timid claims so it does not compete with existing products or services. Then the company launches the compromised product – as they did with the new Low Fat No Fat café, the market says ho-hum, and the company thinks the idea was bad. Actually, the firm does not know if the idea was good or bad because it was crippled by the thousand paper cuts long before customers saw it.
When trying to blitzscale in an existing organization, the leader of the effort must have the ability to drive all the variables that create the customer experience – even if they are at variance with the firm’s current approaches. In the book The Self-Made Billionaire Effect: How extreme producers make massive value, one of the authors noted that innovative designs are a combination of interlocking factors which together create the differentiated experience. Starbucks is not just about the coffee, it combined great labor practices, ambiance, eco-friendly coffee buying, focused menu design, payments, convenience, and other factors which together make Starbucks, Starbucks. In fact, over 80% of the self-made billionaires on the planet make their money in existing, highly competitive markets – usually by combining a few important dimensions into a better experience. If the innovator has to compromise on each of these pieces of the customer experience, they will never succeed.
Be An Investment Not an Expense: Innovations live on a different time scale than existing businesses
Existing organizations hate two things more than anything: time and volume uncertainty. Most organizations are more tolerant of losing money than making money at the wrong time or in the wrong volume. Again, predictability is the key thing large organizations optimize around. But the key uncertainty of any innovation is how quickly will it be developed and adopted? They key unexamined uncertainty in any new product or service is to determine how long the sales cycle is. Will it take a week, a month, six months? To get a sale?
If you are operating within an existing operating budget, this uncertainty usually leads to an early death. However, firms are used to uncertainty when they are spending the capital budget – in the investment space. When Ray Ozzie was running Iris at Lotus Development corporation, he and his team were invested in by the board. Ray was convinced that all office software was going to migrate from single applications like spreadsheets to office suites of many functions. He was right, but it took him a few more years to develop what became Lotus Notes than he predicted. Each year the Lotus board had to make a decision on whether or not to invest for another year. If they did not invest, Ray and his team had the rights to intellectual capital – and could go and work with another company and/or set up shop. Each year, the board decided to continue to fund the experiment until it got traction, and they committed to a massive marketing campaign to get it launched. When IBM bought Lotus for $XB the reasons was to get Lotus Notes.
Residual Claims: Who gets rich?
Nitin Norhia and Paul Lawrence in their book Driven, review research into compensation systems that shows that executives use only about 1/5th of the possible variance in their payment system. That is to say, if you could pay your people between $100,000 and $200,000 in pay for their performance – the actual band you will use will be only $20,000 apart – e.g. clustered around something like $140,000-160,000. This is done because relative pay is a huge social status, social fairness issue and executives will only tolerate so much complaining.
In blitzscaled innovation the leaders deserve outsized compensation if they deliver. Google tried this, to no avail (check) in their multi-million dollar spot bonuses. Private equity firms, and some conglomerates like Berkshire Hathaway do a great job on this issue. A CEO or team who runs a division or one of the portfolio companies have an opportunity to make millions and millions of dollars if they add significant value to the acquisition. At one PE firm one of the authors was part of, the incentive compensation went down to the top 300 executives and managers if they hit their goals. The compensation was substantial. We also think this is why PE firms are three times a likely to turn around a troubled company as a corporate is. PE uses the structural variables of bliztscaling.
We think there are two key actions to keep a sense of social fairness but allow the organization to pay hugely differential compensation. The first thing is to create an opportunity to the executives in the blitzscaling unit to “buy in” – either through putting up capital or deferring compensation. This “buying” process provides legitimation for me getting paid 10X as much as you did, without ripping the company apart. The second is role-based compensation. At PE firms they frequently pay someone for each of their different roles. They can be CEO of one company, a board member on another, and an investor in a third. These different roles also allow for differential compensation which is still seen as “fair”.
Conclusion: Hack the structural variables to achieve blitzscaling at scale
You can pick your analogy: turning the aircraft carrier, teaching the elephant to dance, changing the engines while flying the plane – in any case, blitzscaling in large, post-founder organizations cannot win by copying startups – because that advice misses the vital fact that large organizations hate variance and innovation is, at its core, positive variance. Our suggestion is to think about hacking the four structural variables of organization, decision rights, resource structure (e.g. investment not expense) and residual claims (e.g. who wins big?) With these design variables in mind – the advice on how Apple did it or chasing blue oceans might actually lead to breakthrough growth and corporate reinvention – or what we call Blitzscaling at Scale.
If you want to learn how to drive a digital transformation & scale it up, sign up for a business innovation webinar on Monday, May 13 at 12:00 PM EDT (9:00 AM PDT)