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CHAPTER III - Designing Organizations for Exponential Performance: Reports from the Field

Start-ups with little past history or set procedures are almost by definition in a situation that requires everyone involved to be constantly solving problems and learning new things. But as organizations grow over time, roles and tasks tend to get defined more rigidly and learning slows down. Is it possible for large, well-established organizations to re-design their strategies, structures and operations to function more effectively in a whitewater world? Can they become exponential performers? Several Roundtable participants shared their experiences in attempting to pursue this kind of transformation.

Digital Transformation at Target
Target, with more than 1,800 locations and 2016 revenues of $73.8 billion, is one of the nation’s largest retailers. After years of growth, the company was hit by two major setbacks: a large-scale data breach in 2013 that involved the exposure of personal information of as many as 70 million customers, and the failure of the company’s expansion in Canada, which ended with the decision in 2015 to close all 133 Canadian stores after they had accumulated billions of dollars in losses. The resulting crisis provided a powerful catalyst for change. But even when everyone recognizes the need for change, it is still necessary to provide people with the tools to bring the change about.

First, Target brought in a new Chief Executive Officer, the first from outside the organization. A major restructuring resulted in the replacement of nearly one-third of the company’s core corporate staff and the addition of new people and new capabilities. The company’s incentive structure was changed to provide greater rewards for innovation. While these changes were helpful, they were not sufficient to accomplish the transformation that was needed. Most fundamentally, the company’s culture had to change. One obstacle was that these changes scared many employees who were worried about their future in the organization. To reinforce the mandate for change, the company rewrote its strategic agenda to communicate what the new beliefs and behaviors needed to be. The new message was to:

  • Be bold, aim to lead the market
  • Be curious, ask the right questions
  • Be accountable, find ways to measure performance
  • Be one team, start thinking across the whole organization

These are worthy goals—not all that different from those that General McChrystal set for his Special Operations troops—but according to Casey Carl, Target’s Chief Strategy and Innovation Officer, the reality was that the company “didn’t know how to be a disrupter.” To gain this capability, Target hired people who had entrepreneurial experience, partnered with MIT’s Media Lab on new projects, established a Digital Advisory Council consisting of tech industry leaders from Google, Orbitz and Match.com, and identified and taught best practices related to the process of innovation.

One big shift for Target has been the recognition that its most significant competitor and the biggest threat to its long-term viability was not its longtime rival Wal-Mart but Amazon. (An indicator of Amazon’s importance was a large overlap between Target’s customer base and the members of Amazon Prime). Other digital behemoths like Google and Facebook represent emerging threats. Although these companies provide interesting opportunities for partnerships, Target needs to be careful in deciding where to collaborate and where not.

Reinventing National Geographic for the Mobile Age
The National Geographic Society (NGS) is a venerable 129 year-old “iconic” nonprofit institution that has sponsored important scientific explorations and research projects around the globe. Its magazine is familiar to almost every American, and the organization has established a strong television presence beginning in 1964 with a weekly national TV series that eventually led in 2001 to the creation of the National Geographic Channel in partnership with 21st Century Fox. In 2014, the NGS hired Gary Knell as its new Chief Executive Officer. As with Target, Knell was brought in from the outside—he had previously been head of Sesame Workshop and of National Public Radio—with a mandate to update the organization to ensure its survival.

Knell devoted his first 100 days on the job to a listening tour with the organization’s employees and stakeholders. He learned that the organization was very siloed, with three distinct centers of power: its magazine, its TV operation and its mission-oriented programs that supported important research and exploration activities that included people like Diane Fosse and the Cousteaus. As a non-profit, the organization’s culture was highly risk-averse, with the biggest fear being “wasting money.” But the big conclusions that Knell came away with were that print was in decline, and that the organization’s mission was being overwhelmed by the economics of its television business even though it was paying for its scientific missions. What he saw was an unsustainable structure. And although the organization was still profitable, he saw it moving toward future deficits.

His first effort at change was to re-orient the organization around a core of teaching and storytelling. But that was not enough to put the organization on a sustainable path. He concluded that a more radical step was needed in order to ensure that National Geographic would continue to be viable in the new world of “mobile a la carte users” who were unlikely to remain loyal consumers of either print or traditional video programming.

So in September 2015, he announced that National Geographic’s magazines and cable networks would move into a new for-profit joint venture that would be 73 percent owned by 21st Century Fox. In return for giving up control of these assets, the organization received funding that grew its endowment to $1.1 billion that could be devoted to its core missions.

Leading this transition, Knell acknowledged, was the hardest thing he ever had to do. One challenge was bringing all of the organization’s multiple constituencies—journalists, photographers, scientists, explorers, board members and readers—along on the journey. Each one needed to be communicated with in a different way based on its interests. The main message was that this step was not just a “monetization moment,” but was the best way to ensure the future viability of the organization and its mission. In most instances, he found that 20 percent of each constituency were enthusiastic about the prospect of change, 20 percent were deeply opposed, and 60 percent were in the middle and were persuadable. In some cases, he did a buyout of those who were unwilling to support the plan. Perhaps his biggest single challenge was convincing his board: he met with them eleven times before they agreed to the move.

Today, Knell presides over two different teams on the same campus in Washington, D.C.—the for-profit media company and the nonprofit side that invests in the organization’s mission to support teaching, cartography and natural and environmental science.

Moving from Hardware to Software at GE
General Electric (GE) is almost the same age as National Geographic. It has been in business since 1889 when a group of companies founded by Thomas Edison were brought together to form the Edison General Electric Company. During the twentieth century, the company became one of the country’s largest industrial manufacturers by building what Peter Marx described as “machines that spin”—turbines, jet engines, locomotives, etc. But even while GE was making a lot of money from the sale of equipment, it began to make more money from servicing the machines, and increasingly, it sees its future as selling software that will improve their function.

However, transforming a company with 330,000 employees and annual revenues of more than $100 billion is a formidable challenge. Just as Google has been successful by selling search rather than algorithms (the digital machinery that underlies search), GE’s goal is to shift customers from buying hardware to buying energy or thrust or horsepower. And just as Google played a central role in the growth of the Internet, GE is a key player in creation of the “Industrial Internet” that brings the power of connectivity and analytics to the physical world.

In 2015, GE created GE Digital, a new division with the mandate to assist customers in leveraging digital assets. Among its first products is software that creates “digital twins” of machines that can be used to emulate and optimize their operation. Also in 2015, GE launched Predix, a cloud-based software platform, which it describes as an operating system for the Industrial Internet, “similar to iOS or Android, but built for machines.” As noted in last year’s Roundtable report, GE’s Chief Executive Officer Jeffrey Immelt has stated that he expects the company to be a “top 10 software company” by 2020.

In addition to shifting its focus from hardware to software, GE is also experimenting with new ways of operating its existing businesses. One effort involves streamlining the development cycle for new appliances, a process that typically involves up to four years and $40 million to launch a new product. To explore new, leaner ways of operating, GE launched a partnership with Local Motors, a small company in Louisville, Kentucky, that has pioneered the open source collaborative design and manufacturing of cars and other types of vehicles. In 2014, the two companies opened a “co-creation space” called FirstBuild in Louisville (home of GE’s appliance division) that invited community members to work with designers and engineers to devise novel kitchen appliances, then build them in a “microfactory” and offer them for sale, with the possibility that successful concepts could be moved to a traditional GE manufacturing facility for mass production. To stimulate new ideas, FirstBuild holds twice-yearly hackathons on topics such as “The Future of Cooking.” The venture’s most successful effort to date has been a small countertop “nugget ice maker” that was funded through a $2.7 million Indiegogo campaign and is now being sold online under the FirstBuild brand.

T-Mobile Goes “Un”
Transformation is not for the fainthearted, according to Kelvin Westbrook. As a member of the board of T-Mobile, Westbrook has watched that company move from being a second-tier wireless carrier far behind the industry leaders, AT&T and Verizon, to being frequently identified as one of the fastest growing and most innovative companies in its industry. The change began in 2012 with the arrival of John Legere as Chief Executive Officer, whom Westbrook described as a “Pied Piper” who took the company’s existing business plan and “threw it out the window.”

Legere came to T-Mobile after a 20-year career with AT&T, where he learned the telecommunications business, and then a decade with Dell, where he learned about operating in a highly competitive marketplace. One of his first steps as Chief Executive Officer was to eliminate the company’s policy that forbade store employees from having tattoos or piercings, a largely symbolic action designed to signal that business was not going to be “as usual.” He then moved on to the larger task of re-branding T-Mobile as the “un-carrier” by systematically re-making the company’s offerings to target the things that customers liked least about other carriers’ cell phone services: he eliminated multi-year contracts, offered plans with no data limits, and instituted a simple pricing scheme that contrasted sharply with the complex plans of other carriers.

Legere, a charismatic leader who is emphatically non-traditional in appearance and behavior, has been able to bring about these big changes “by giving his employees something to rally around: a big, audacious goal” and also by giving them “the tools to change.” And he keeps upping the stakes. Just recently, he announced that he believed that by 2020, T-Mobile would have more subscribers than AT&T (which currently has 132 million subscribers to T-Mobile’s 67 million). The company’s track record over the past few years suggests that this goal may be obtainable: At a time when the industry has essentially reached saturation, T-Mobile has been adding more than a million new customers each year and has been expanding its subscriber base at an accelerating rate. And since Legere became Chief Executive Officer, the company’s stock price has increased from $14 to $64.

Although these stories are impressive, the number of established companies that have successfully gone through a major transformation is still very small. Other organizations have recognized the need to change and have embarked on their own journeys but still have further to go.

Art Basel: From Local Flea Market to Global Cultural Entrepreneur
When Marc Spiegler joined Art Basel in 2007 as co-director, the Swiss-based organization was responsible for putting on two major art fairs each year, one each in Basel, Switzerland and in Miami Beach, Florida. By 2012, when he was promoted to being the global director, it was about to launch a third fair, in Hong Kong. The company had grown from its initial role in staging a “flea market for art” in one city to a major international force in the art market, including a collaboration with Kickstarter to generate funds for dozens of art nonprofits around the world; and the BMW Art Journey Awards for emerging artists. But Spiegler, who had a background as a freelance arts reporter and columnist, realized through painful experience that the organization’s centralized decision-making structure was preventing it from expanding further and reacting quickly, especially outside Europe. Starting in 2015, Spiegler worked closely with his leadership team and reorganized the company to give more power to its regional directors. This allowed it to pursue new initiatives, such as Art Basel Cities, a program intended to support cultural collaborations with cities around the world.

As the organization has evolved, it has shifted focus from simply staging discrete events in different cities to building a global brand that can support a variety of initiatives that serve artists and the galleries and other institutions that support them. Spiegler was able to make this shift without having to experience a crisis, but he speculated that at some point, it might almost be necessary to trigger a crisis to catalyze bigger changes.

Corning: Glass Half Full or Half Empty?
Corning, Inc., founded in 1851, is even older than GE and National Geographic. The company started by making glass lenses for railroad lanterns that would not break in the rain. Today it manufactures a wide range of innovative glass and ceramic products including “Gorilla Glass,” the tough protective glass used for the screens of handheld devices, including the iPhone; ceramic emission control devices for catalytic converters; and, perhaps most notably, high performance optical fibers for broadband networks, which it invented in the late 1960s and of which is still the dominant supplier globally. The company prides itself on its capacity to invent innovative new products and invests approximately 10 percent of its revenues in research and development.

David Morse, Corning’s Executive Vice President and Chief Technology Officer, has seen many changes in his 40 years with the company. But Corning’s core mission of creating new materials that serve significant needs has not changed. The company did experience a major crisis at the turn of the century. During the dot-com boom, the company rapidly expanded its production of fiber optics, and the company’s stock soared to over $100. But with the dot-com crash in 2000, Corning’s stock price collapsed to just over $1 per share. The company and its stock has recoved since then, and its revenues and profitability have increased over the past decade.

The biggest challenge today for Corning, according to Morse, is to “bring agility to invention.” The company has invested heavily in computer modeling and now has “a couple of hundred” people involved with modeling projects. As a result, it has been been successful in accelerating the process of creating new materials. But the scaling up of their production is still not agile. In several cases, they showed new materials to potential customers who wanted them, but they were not able to maufacture them quickly enough to meet the demand. In fact, the company is “overrun with inventions” that could be turned into products if they could figure out how to be more agile in manufacturing.

Lessons Learned
What are the lessons that can be drawn from this disparate set of stories? The Roundtable participants offered some answers.

Heather Rangel, U.S. Technology Sector Leader at Deloitte Tax, pointed out that the employees of an organization need a clear understanding of its mission and its goals if they are going to support and participate in transformative changes. She can see how powerful it is for her clients who belong to truly mission driven companies.

Caroline O’Connell of BNY Mellon noted that a leader can articulate a mission and offer a vision for change, but unless it is authentic, with concrete proof points, it will not have the power to effect a transformation. John Kunzweiler, an independent corporate and public sector advisor, agreed that, ultimately, “everything comes down to the leader” of an organization. But the most effective leader may be someone who is “somewhat crazy,” who has swagger and doesn’t follow normal rules. This certainly applies to John Legere at T-Mobile, and also to Steve Jobs at Apple. Even Jeff Bezos at Amazon has not followed conventional rules. It is noteworthy that all four of the dominant tech companies, the so-called GAFA group of Google, Apple, Facebook and Amazon, have all been led by their founders for much or all of their existence, and they are all companies where saying “it’s not my job” is not acceptable.

Finally, Marc Spiegler and John Seely Brown noted that in a whitewater environment of rapid changes, the goal is not just “to make a change” or “go through a transformation” as a one-time event, but to create an organization where continuous adaptation in response to constantly changing challenges and new opportunities is the norm. If you are going to take exponential change seriously, Brown concluded, you need a structure that will support continuous experimentation, that empowers people to act as they see fit without having to get permission in advance.

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