In the face of technological and commercial disruption, business leaders may be tempted to follow their instincts to play it safe and become risk averse. However, that strategy may actually lead to greater long-term risks for their enterprises, argues Dr. Michael Raynor, managing director of Deloitte Services LP.
Brian Peccarelli, president of Thomson Reuters Tax & Accounting business, spoke with Dr. Raynor, the author or coauthor of four best-selling and critically acclaimed books on strategy and innovation, to learn what executives might do to cultivate innovation in their organizations and become prepared for the business of tomorrow.
Brian Peccarelli: In your book, The Three Rules: How Exceptional Companies Think, you claim the three rules for success are:
- Better before cheaper
- Revenue before cost
- There are no other rules
What advice do you have for companies on how to embrace the riskier side of the equation, i.e., “better” and “revenue”?
Michael Raynor: What I’d say is that they’re actually not riskier. Of course, the likelihood of achieving exceptional performance is fairly low because, after all, very few companies are exceptional, by definition: Not everybody gets to be above average.
However, if you seek exceptional performance, not only are you more likely to achieve it if you dedicate yourself to differentiation and driving revenue, rather than attempting to compete on price and cost, but if you fail to achieve exceptional performance, you’re still likelier to do better than if you focused on price and cost. In other words, the downside of failing to be exceptional is not somehow total failure and bankruptcy. Instead, the downside of pursuing exceptional performance in the way that we prescribe is more likely to be strong performance. It’s like saying you’re going to go for the gold. The downside of failing to achieve the gold is not utter catastrophe; it might be the bronze and that’s not so bad.
For a lot of companies, what feels like the safe course (competing on price and on cost) is very often the far riskier approach because there’s typically only one winner since there’s only one lowest price and only one lowest cost. If you’re not that player, you’re in big trouble.
Whereas, if you pursue a differentiated strategy and don’t manage to find the 47% of the market that wants the one unique thing you’re able to create, you may end up finding the 15% of the market that does. That may not be the blow-the-doors-off outcome you were hoping for, but you still have a profitable and viable business, which is not such a bad downside.
Peccarelli: With the rapid acceleration of technology and innovation, can we ever really know the secret to becoming – and staying – a true innovator as an organization?
Raynor: In conceptual terms I think we might be able to. A lot of it comes down to how you choose to define innovation. A useful way to think about innovation is in terms of breaking constraints. A company that seeks to innovate continuously, and to build its competitive advantage on that ability, would have to build the capability to recognize what the next constraint is that they would benefit most from breaking. Because we’re always subject to constraints. Until you can get something for nothing, there will always be constraints.
The problem is that of all the constraints that a customer faces in their lives, you have to know which of those you are best able to break and which of them would your customers most value having broken. That requires deep insights both into customer needs and requirements and also into your own organizational capabilities and the relevant technologies.
Peccarelli: What’s one of the most common mistakes companies make when they decide to become more innovative?
Raynor: I’d say it is the problem of focusing inwardly. When we say we’re going to innovate more, we tend to look at things that matter to us, not that matter to our customers. We tend to benchmark ourselves against ourselves, rather than against the relevant competition.
A lot of organizations spend a lot of time and effort to get better, only to discover that the improvements that they have delivered to the marketplace do no more than simply allow them to stay on par with their existing competition. That’s unfortunate.
The kind of innovation that really leads to breakthroughs is innovation that breaks the constraints that customers care most about, and innovation that separates you from the relevant competition. It’s important to think about your customers and your competition, rather than thinking about your own capabilities and historical performance.
Peccarelli: What excites you the most about the technological transformation occurring in the world?
Raynor: What excites me the most about the technology-driven transformation that’s upon us now is the rise of the importance of data on all dimensions of our lives. Our ability to generate, capture, analyze and act on data from all those dimensions has a potential to make our lives a lot better in a great many ways. We can get precisely what we need and want, precisely when we need and want it, on precisely the terms that we might wish.
But it is a double-edged sword. What gets forgotten is that the price of getting exactly what you want is that somebody else knows exactly who you are. When our behavior is observed in great detail, it becomes possible for other parties to predict what we will do and as a consequence, control what we’ll do in ways that we may not even realize.
There are a lot of things to be excited about as a consequence of the rise of data. We no longer have to bump our way through a dimly lit hallway. We can actually turn on the lights and see what’s happening. That’s extraordinarily powerful and enormously exciting.
It’s critically important to have an equally heightened diligence and care to make sure that in our pursuit of those benefits we don’t give away some fundamental rights and freedoms that, once gone, are enormously difficult to reclaim.
Getting to know Dr. Michael Raynor
How do you personally stay motivated to keep innovating?
I suppose it’s just a curiosity. There’s always something more to learn, something we don’t understand as well as we would like. Sometimes the journey takes a lot longer than you thought it would. The research project that gave birth to the three rules mentioned earlier was seven or eight years in the making. That took a certain amount of persistence to see through to the end, and sometimes that can get a little discouraging, but that’s where working with great people and having great colleagues helps enormously. When you feel your enthusiasm lagging, they can put an arm around your shoulder and keep you going and vice versa. It’s the internal motivation born of curiosity and the desire to learn, and the fact that I’ve had the good luck to work with great people who have been similarly motivated.
What motto do you live by on a daily basis?
The Raynor family coat of arms carries the motto “Amicitia est sancta,” or “Friendship is sacred.” Friendship is a sentiment and a relationship that the ancients spent a lot of time thinking about, but in modern society I’m not sure that we do. Romantic relationships, family relationships – these are enormously important and tend to be treated with due care. But when people have 5,000 “friends” thanks to social networking technology, it seems to me the concept of a friend has been devalued through inﬂation. I think that friendships fill an enormously important role in our emotional lives, and we neglect them at our peril.
If you could live anywhere in the world, where would it be and why?
These days my family is into surfing and scuba diving, so I suppose Hawaii wouldn’t be such a bad place to be. I’d also say the interior of British Columbia for skiing. So maybe … someplace close to an airport that has frequent service to both Hawaii and Vancouver?
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