Need To Reinvent Your Corporation? Time’s Running Out.

European Straits #173

Hi, it’s Nicolas from The Family. Today, I’m launching the groundwork for a more systematic approach when repositioning legacy corporations in the shift to the Entrepreneurial Age.

⚠️ First of all, I’m back on Sifted! Here’s my latest column (published earlier this morning), European startups have avoided big layoffs. Is that a good thing?

As the lockdown period is (gradually) ending, it’s time for a first round of assessments on how the startup world has fared during the pandemic. In particular, there’s a stark contrast between how entrepreneurs in Europe and those in other parts of the world, notably the US, have approached human resources… It can be summed up in one phrase: US startups fired while European startups waited.

Make sure to go and read the whole column 👀 On to today’s issue 👇

1/ The difficulty in transforming legacy organizations is the reason why I switched to the tech world exactly ten years ago. I grew up and was educated in a world where the most ambitious people were attracted to the largest organizations. For most of us, a rewarding career was about climbing up the hierarchy and managing an ever larger group of people. Only large organizations, it seemed, provided access to the resources (talent, capital) needed to make a difference in the world.

I did a brief stint in the private sector but then like many of my peers in France, I decided that the largest organization of all—the government—was where I could really make a difference.

My first years as a senior civil servant were still a period of hope. In the wake of a global movement to upgrade government, known as new public management, every day let us play with shiny new ideas in various fields: zero-based budgeting, performance management, public-private partnerships, quasi-markets, reengineering, upgraded information systems, procurement reform, and so on.

The whole effort, however, ended up in a dead end. As I wrote in my book Hedge

Some experiments did advance, particularly in the fields of zero-based budgeting, performance management, delivery of public services, and public-private partnerships. But few led to convincing results at a national scale. In the end, a highly resilient bureaucracy neutralized innovative efforts and state intervention was scaled back down to business as usual.

The situation was made even worse by my belonging to the Inspection des finances, a department where people are supposed to help cabinet ministers and top government executives make the bureaucracy more efficient and public services more effective. Needless to say, inspecteurs des finances tend to end up disillusioned. When you dedicate years of your life to targeting complex policy problems and providing solutions, the fact that the latter are almost never implemented, usually because of the politicians’ pusillanimity, can break your morale.

This is why most of these people eventually turn their back on bureaucratic jobs. After their stint ‘reinventing’ government, they either switch to politics in an attempt to change things from the top down (case in point: Emmanuel Macron), or they leave to join the private sector because things seem to be easier there (they aren’t, but nonetheless) 👇

2/ What I did was a bit different: I joined the startup world. It’s a long story, but mostly there were two big drivers: I had a background in computer science and knew a few things about the Internet; and in 2009-2010 I finally realized that the people making a real dent were not those at the helm of large organizations, but rather tech entrepreneurs harnessing the power of dedicated users to solve problems that had long remained without solutions.

From that point onward, I became a zealot of entrepreneurship. For me, the world was divided in two. There were the old, exhausted organizations, the ones that were bound to crumble and die sometime soon. And then there were the startups founded by entrepreneurs. For me, the latter had three things that legacy organizations, whether public or private, lacked:

  • Focus, as entrepreneurs are obsessed with solving one problem. They work on it during the day, and they dream about it at night. It creates an unrivaled capacity to focus. 

  • Inventiveness, as entrepreneurs are deprived of resources. It leads them to explore uncharted territories when it comes to designing solutions and implementing them.

  • Fearlessness, as entrepreneurs have nothing to lose. This is what makes them prone to enter that frustrating process of “trial, and error, and error”, to quote Bill Janeway.

3/ When you join the world of entrepreneurs, you’re bound to become a harsh critic of large organizations. Here’s Paul Graham in The Power of the Marginal, pointing out “a few of the disadvantages of insider projects”:

The selection of the wrong kind of people, the excessive scope, the inability to take risks, the need to seem serious, the weight of expectations, the power of vested interests, the undiscerning audience, and perhaps most dangerous, the tendency of such work to become a duty rather than a pleasure.

Back in 2013-2014, my cofounder Oussama Ammar and I launched a series of 24 conferences titled Les Barbares attaquent! The concept was simple: we’d explain to top managers in a given sector how startups were entering their industry, bound to displace them and make them irrelevant. It was pretty traumatic for our audience, but people kept coming back. They even demanded more: What could they do to contain the Barbarians? Was there a way for incumbents to survive, or even win the war? 

The questions came more frequently. Top executives asked to meet with us privately. And so we ended up reflecting a bit more on the contrast between small, fast-growing startups and large, exhausted incumbents. After many iterations, there were three main outcomes:

4/ All of that underlies the reason why I’m dedicating this issue to large corporations: I’m convinced COVID-19 will dramatically accelerate the current paradigm shift in basically every industry. That means corporate executives have precious little time to wake up, figure out how to change many things, and implement those solutions at scale. There’s simply no more time to waste. It’s happening now.

My feeling here can be elucidated by two pieces of news—neither of which have probably emerged on your radar, and yet they’re quite revealing:

  • PSA, the largest French automobile manufacturer, has announced a switch to remote work for all of its white collar workers. Until now, like everyone else, they were playing around with innovation at the margins of their business. But the crisis has forced them to implement a radical upgrade. The scale at which change is happening is unprecedented—and it’s in the automotive industry, the cradle of the old paradigm of the automobile and mass production!

  • Royal Bank of Scotland has announced that it’s closing down its digital bank for consumers, Bó. This, I think, is an important signal. Prominent corporations are realizing that embracing the new paradigm demands more than simply launching a “digital” venture on the side. In other words, being relevant in today’s economy requires transforming the organization at its core—and the fact that the reckoning happened during COVID-19 is all the more telling. 

If things are indeed accelerating, what should corporate decision-makers do? On Friday I’ll share a set of 14 best practices with my paying subscribers—a playbook for corporate executives who want to stay in the big leagues and are ready to tackle the strategic challenges of the day.

Today, however, I’d like to stress a series of principles that every corporate executive needs to keep in mind if they want to navigate the dangerous sea of repositioning large corporations in a changing economy. I’ve written about most of these in the past, but synthesizing things is always a positive, especially when it’s time for action.

5/ First, you might have the impression that your sector will endure, and thus your company is bound to survive. The likes of SNCF and Deutsche Bahn point out that we’ll still need someone to make the trains run on time (true). And automotive manufacturers like GM or PSA make the case that people will still need cars decades from now, and building them at scale is best mastered by incumbents (also true). 

This is why you need to reflect on the paradigm shift not at the scale of your particular sector (and even less at the scale of your company) but rather at the scale of the entire industry’s value chain. In The Five Stages of Denial, I decided to focus on the book industry because it’s an area where the paradigm shift is quite advanced, and the business case as a whole is quite educational.

Consider this: We still need authors to write manuscripts, and we still need publishing houses to turn manuscripts into books and distribute them across vast territories. However a new player has burst into the book industry to make the case that the way we were selling books to consumers could be radically changed by technology. With Amazon replacing traditional bookstores, what has dramatically changed is the distribution of power and value between the various links within the value chain. In the past, publishing houses were grabbing the lion’s share (at the expense of bookstores). Today, we still need them indeed, but they’ve lost their bargaining power and have to cope with lower margins and increased competitive pressure.

Takeaway 👉 You may still be around years from now; however, the equation underlying your business will have entirely changed. Whether you like it or not, you need to reposition.

6/ There are certain tradeoffs that contributed to shaping the way you do business, but they’re not valid anymore. Therefore you need to kick them out of your head once and for all. Here’s what I wrote in 2016 in my article A Stout Porter: Business Strategy in the 21st Century:

Trade-offs tend to evolve as technology progresses and techno-economic paradigms shift as a result. Some trade-offs exist in a certain moment, and then disappear the next. If strategy is the art of embracing constraints, it should take into account the fact that the set of constraints evolves as time goes by. For instance, Porter points out that “what were once believed to be real trade-offs — between defects and costs, for example — turned out to be illusions created by poor operational effectiveness.” Thanks to operational innovation, Japanese car manufacturers broke that constraint and forced a realignment of the industry as a whole.

Likewise, in the digital economy, many Fordist trade-offs have become illusions: they persist in appearance, as Fordist companies driven by economies of scale refuse to seize the opportunities brought about by technology; but they effectively cease to exist as soon as a given company converts to the game of maximizing increasing returns to scale.

One trade-off that doesn’t exist anymore is that between quality and scale. Increasing returns, the new “right goal” and a critical microeconomic feature in the digital economy, are key here. Once you generate them, the more you grow, the easier it is to provide high quality.

Takeaway 👉 Technology matters because it makes it possible to deliver quality at scale. It’s critical that you understand how to apply this to your specific business.

7/ They say the large scale of an organization makes it difficult for you to embrace the new paradigm. Indeed, scale means power, but it also means weight, sluggishness, and rigidity. Even tech giants aren’t spared: for instance, you might think that Google is still capable of innovating at scale, but here’s what software engineer, blogger, and former Googler Steve Yegge wrote in 2018

Most big companies don’t innovate at a large scale. It’s normal. You have two perfectly valid alternatives for responding to market shifts: You can acquire the innovator (or one of their competitors), or you can build your own competing product and compete head-to-head.

Google’s problem, in my personal opinion, is that although by and large they are not innovating (which, again, is normal for big companies), they also aren’t doing the alternatives very well. Their acquisitions have slowed; instead they prefer to build competing offerings. (Is this arrogance? Sometimes, for sure.)

My view is that it’s been generally OK so far to think that because you’re helming a large organization, you’re not supposed to be as innovative/agile as the others. But now that’s enough of this idea that scale means you’re powerless. Don’t you remember, like me (the former senior civil servant), a time when scale meant an unrivaled capacity to make a difference?

I think it’s time we all realize the difference between two very different contexts:

  • One is that of large incumbents in Carlota Perez’s “installation period”. This is when the new paradigm is so new and hard to decipher, and the old paradigm still rewards dominant players with such comfortable profits, that there’s no reason to attempt a radical change when it comes to your core business.

  • But today’s context is very different. Software has made such progress in eating the world that everyone—customers, employees, even shareholders—is convinced that there’s a better way. And so now scale should be seen as an asset, rather than a liability, when it comes to implementing radical change. Just look at PSA, deciding that remote work should become the norm!

Takeaway 👉 We’ve heard for some time that radical innovation could only happen at the margins. Now that time is running out even more quickly with the pandemic, it’s time you make it happen at scale. 

8/ Most of what you’ve achieved over the last three decades has now become an obstacle. One example is financial management. A key approach to sound financial management in the 1990s and beyond was about dividing your organization into a portfolio of separate activities and making sure each and every one of them had their own P&L. Yet this is precisely what makes it so difficult for large organizations to reposition. As recounted in a 2011 Fortune article about Apple,

Most companies view the P&L as the ultimate proof of a manager’s accountability; Apple turns that dictum on its head by labeling P&L a distraction only the finance chief needs to consider. The result is a command-and-control structure where ideas are shared at the top—if not below. Jobs often contrasts Apple’s approach with its competitors’. Sony, he has said, had too many divisions to create the iPod. Apple instead has functions. “It’s not synergy that makes it work” is how one observer paraphrases Jobs’ explanation of Apple’s approach. “It’s that we’re a unified team.”

Another example of yesterday’s good practices that have turned into bad practices today is managing talent. So many companies in the 1980s and 1990s, starting with that model that was General Electric (as well as tech companies such as Microsoft), used to implement a practice known as “stack ranking”. Yet as my wife Laetitia Vitaud wrote in March in Everything that’s wrong with modern management, stack ranking works against the big challenge of repositioning an organization as big as General Electric or Microsoft,

Initially the approach seemed to work quite well for GE, but after decades of “Rank and Yank”, managers were forced to become intellectually dishonest. To conform to the model’s requirements, they had to categorise as “bottom 10 percent” excellent employees who had not spent enough time promoting themselves to their managers. The result was that employees started spending more time worrying about being seen by their managers as top employees than actually being top employees. And of course there were so many biases at every stage. 

Takeaway 👉 It’s time to get rid of all those ‘best practices’ that were taught to you by university professors, management gurus, and strategy consultants in the 1990s. Those were ideal for reinforcement and consolidation in the old paradigm. They’re fatal when it’s time to embrace the new paradigm.

9/ It will get better before it gets worse. This one is rather simple. If you’re leading a company that dominates its market at the moment, there’s a high probability that the acceleration of the paradigm shift contributes to strengthening your position on the market (see my What’s Happening With the Stock Market?).

My reference in these matters is the music industry, and its being disrupted by the likes of Apple, YouTube, and now Spotify:

  • At first, the rise of tech-driven new entrants sounded like bad news for legacy players. We all saw that graph showing the collapsing of the industry’s revenue once users decided to listen to music online rather than switching on their radio and buying CDs.

  • But then the reaction of legacy players was to consolidate. In this case, Sony acquired BMG and Universal acquired most of EMI, which provided them with enough bargaining power to generate profits at the expense of their weakest competitors and regain the advantage (temporarily) over tech companies.

Takeaway 👉 You might think that everything is fine and that you have contained the damage. Yet it’s likely a fleeting moment before tech companies down the stream eventually tip the balance within your industry.

10/ Because, by the way, the competition is about to get bigger and stronger! Just think about what’s happening these days:

  • Just like at any time since the Internet became a thing, it’s becoming easier and easier for entrepreneurs to enter new markets, whatever the industry.

  • Meanwhile, the COVID-19 crisis is boosting tech giants such as Amazon and Netflix, prompting them to double down on expansion and diversification.

  • Finally, newcomers in tech entrepreneurship will be able to access more and more capital, which in turn will accelerate their growth for at least two reasons: so much money has been deployed by governments to try and contain the crisis; and financing tech-driven businesses is expanding and diversifying at an accelerated rate as explained in Alex Danco’s masterful Debt Is Coming.

Takeaway 👉 You thought fending off tech companies was hard? It’s about to become 10 times harder! You’ll need to take radical action if you want to survive.

What action exactly, you might say? Well, it’s time to subscribe if you want to receive my 14-point playbook of rules and practices for corporate executives who want to stay in the game (as well as a reading list complementing today’s issue). Here’s the link 👇

🎙 For those of you who understand French, here’s a podcast I recorded with Alexis Menard of Go Capital about The Family and the venture capital industry, building upon a previous issue about What Is Venture Capital? Here it is: #31 - Nicolas Colin (The Family) - Qu’est ce que le Capital Risque / le VC ?

🇫🇷 Still in French—Don’t forget to have a look at our media Nouveau Départ if you want to understand the current transition as accelerated by the COVID-19 crisis. By the way, all video contents are now available as podcasts! Recently Laetitia and I covered topics as diverse as the future of the workplace (with Camille Rabineau), the transition in the yoga industry (with Marie Kock), how Sweden is tackling the pandemic differently (by Laetitia), and reshoring in a fragmented world (by me).

From Normandy, France 🇫🇷