8

An essential framework for continuous innovation

KAIHAN KRIPPENDORFF

In the early 1800s, Hudson’s Bay, a Canadian trading company, was facing collapse because a competing trading company, the North West Company, had adopted a new distribution strategy. By moving trading posts closer to customers, North West established a more flexible, decentralized management structure. Hudson’s Bay’s centralized bureaucracy hindered the company’s reaction time, and by 1809 the company seemed destined to close. In that year, however, Hudson Bay’s ownership changed hands. The new leadership quickly copied its rival’s approach, moving trading posts nearer to customers and decentralizing operations.

By breaking through rigidity to react to a changing environment, the new owners saved the company.⁴⁰ In time, Hudson’s Bay overcame its rival, merging with it ten years later, and survived as the Hudson’s Bay Company, considered today to be the oldest surviving commercial enterprise in Canada. The ability to adapt and transform quickly proved essential to the organization’s survival.

The lessons of Hudson’s Bay’s success are even more poignant today. In 2020, most of us experienced the greatest moment of change we are likely to experience in our lifetimes. When the COVID-19 pandemic hit, across industries and across markets, it was clear that adapting quickly and creatively to a changing environment is fundamental to a company’s ability to survive and thrive. Almost overnight, brands pivoted to launch new offerings, institute remote working environments, and shift their services online.

Rather than slowing down in the post-pandemic world, change is picking up speed and becoming a constant. New technologies are being adopted faster, and disruption — by competitors, technological innovations, or unforeseen external forces — is ever-present. To survive in the future, your organization needs a strategy that can adapt and flex with the pace of change; one that offers creative options to keep you among the disruptors, rather than the disrupted, and that opens up space for continuous innovation and perpetual transformation.

The OODA Loop

John Boyd was one of the U.S. military’s most brilliant strategists.⁴¹ Today, he is known only to a small community of military tacticians and students of military methods. But his insights have come to define the basis of modern warfare.

During the Korean War, Boyd served as his squadron’s commander and tactics instructor. Their F-86 jet fighters yielded less firepower or thrust than their opponents’ MIGs, yet Boyd’s pilots averaged a 10:1 kill ratio against their enemies. Throughout much of Boyd’s career as an instructor, advisor, military theorist, and fighter pilot, he maintained a running bet that with forty seconds in the air he could beat any pilot in aerial combat. “Forty-second Boyd,” as he came to be known, never lost this bet.

Asked to explain his methods, Boyd developed a theory of conflict that is now shaping militaries all over the globe. Central to his theory is that the entity — the squadron, army, company, government — that adapts fastest to changing events wins. He specifically identified four interdependent phases an organization or organism must pass through to adapt to changing reality: observation, orientation, decision, and action (the OODA loop, or Boyd cycle). To beat your competition, then, you must cycle through your OODA loop faster than them and/or hinder their ability to cycle through theirs. In Boyd’s terminology, you must get “inside the enemy’s OODA loop.”

Boyd’s principle has been at work for millennia, determining winners and losers on battlefields and in corporate conflicts. Master tacticians from Alexander the Great to Sun Tzu have demonstrated how the ability to adapt faster than the enemy can alter the outcome of a battle. And as the Hudson’s Bay story illustrates, there is evidence of cycle time being a determinant of competitiveness in business as early as the turn of the nineteenth century. So, what does Boyd’s theory teach us about perpetual transformation? Taking the four OODA elements in turn:

Observe

Due to the highly structured nature of organizations, most struggle to consistently respond creatively and quickly when their environment changes. Companies stifle creativity by relying too heavily on logical methods — they assume that since a strategy has worked in the past, it will work in the future. This results in repetitive, risk-averse strategies that fail to inspire innovation and transformation.

Through my work, which has spanned over two decades of strategy consulting workshops, training more than 5,000 clients in strategic-thinking agility, and researching several books, my colleagues and I have recognized common barriers to strategic innovation. One of the most prevalent hurdles that keeps companies from innovating is that they fail to observe that their environment has changed, and that new opportunities or threats have emerged. The reasons for this failure to observe are manifold, some of which I address below. What is important to understand is that most companies that have historically overcome disruption did so because they recognized and executed strategic options that their competitors would not, long before others even observed change might be on the way.

Hon Hai Precision Industries, for example, has become one of the world’s largest electronics manufacturers, serving clients such as Dell, Apple, Cisco, Nokia, and Sony, and averaging 50 percent annual revenue growth over the last decade. Hon Hai achieved this by observing an industry dynamic emerge before others. In 1974, at a time when most electronics manufacturers were busy producing consumer electronics, Hon Hai was founded as a plastics manufacturer. Toward the end of the 1970s, however, it noticed an emerging trend. Because the company was located in Taiwan, the outskirts of this emerging trend, Hon Hai was one of the first to observe computer firms increasingly seeking to outsource production in Asia. As a result, in 1981, Hon Hai began producing computer connectors for a relatively unknown, six-year-old company called Microsoft. As Microsoft grew into one of the largest corporations in the world, Hon Hai enjoyed the pull of Microsoft’s wake. By observing what few others were close enough to notice, Hon Hai took an early role in the emerging computer revolution. Today, Hon Hai produces $16 billion per year in revenues.⁴²

Start at the edges

Like Hon Hai, your chances of outthinking your competition greatly improve if you can observe emerging trends before they do. Columbia Business School professor and globally recognized strategy and innovation expert, Rita McGrath has extensively researched how companies can predict and respond to environment changes, or inflection points, before they happen. She references former Intel CEO, Andy Grove, who observed, “When spring comes, snow melts first at the periphery, because that is where it is most exposed.”⁴³

McGrath argues that inflection points are not completely random — they can be observed and anticipated if we learn to look in the right places. To prevent being blindsided by rapid change, she recommends encountering the “edges.” Rather than developing your strategy while locked away in a boardroom with a team of C-suite leaders, put yourself in contact with customers, employees, and other key stakeholders. Observe and uncover their pain points. Interact with diverse audiences and perspectives. Then, to ensure that your organization can act on these observations, empower and put trust in small agile teams that can move quickly and try new things. Remove bureaucratic corporate systems and red tape that weigh down decision-making and reporting processes.

Zoom out, then zoom in

John Hagel, the highly respected management consultant and founder of Deloitte’s Center for the Edge, told me: “If you look back 20 or 30 years, strategy was about understanding your company’s specific position in an industry to generate a fixed amount of value. Today, the world is much more dynamic.” The boundaries between industries are becoming blurred — retailers are entering the banking industry,⁴⁴ big tech players are opening beauty salons,⁴⁵ and auto industry leaders are launching rockets into space.⁴⁶

Hagel warns that a big shift is underway. “If you zoom out 10 to 20 years and you think you’re going to be the same business that you are today, go back to the table.”

He offers the concept, “zoom out/zoom in.” Look ahead to your ten-to-twenty-year horizon and imagine, based on your observations and market insights, what your market or industry will look like. What are the big opportunities that you could target? Then zoom in to the next six to twelve months, what are the two or three initiatives that you could pursue that would have the greatest impact on moving you forward into the future?

Key questions to ask

To outthink your competition and market, it helps to put in place an information network that can feed you early warning signs of critical changes. Ask yourself the following questions:

• What competitive, market, technological, socio-demographic, or regulatory developments should I look for?
• What are the “leading indicators” I would expect to see change before these developments appear?
• Am I currently able to observe these leading indicators?
• If not, where does this information reside and how can I monitor it?

To prepare for a strategy brainstorming session, gather as much trend data on these leading indicators as would be useful. Much of this information may already reside inside your company. Indeed, we have found that corporations often gather more information than they can process and so are surprised to find that they are already collecting many of the leading indicator data they need. By triangulating data organized from seemingly unrelated areas of your operation, you may pinpoint what you need.

Orient

Often, companies that have successfully observed that their environment has changed fail to orient (or reorient) themselves to the implications of this change. We may observe clouds forming, for example, but fail to make the mental leap to consider the implications, that rain may soon fall. When I worked at McKinsey & Company, we were taught to continually ask, “so what?”

With your leading indicator data from the previous step in hand, it is critical that you think through the potential implications, especially if you are content with your current future because otherwise your change efforts will lack momentum.

Consider the case of the apparel company Puma, for example. In the decade beginning in 1995, Puma grew nearly twice as fast and was nearly twice as profitable as its peers. A troubled company in the early 1990s, Puma’s recovery can be traced directly to the fact that board members had grown so discontented with the company’s performance that they were prepared to make a radical strategic shift. They replaced the top management and embarked on a bold new strategy — one centered on fashion rather than athletic performance.

The company’s rival Reebok faced similar financial troubles around the same time that Puma transformed its strategy, but because Reebok’s performance was good enough to offer the company’s leadership hope, it never swallowed what was required to transform. In 1994, Puma’s revenues were just 8 percent of Reebok’s. A little over ten years later, Puma had significantly closed this gap, reaching about 50 percent of Reebok’s revenues.⁴⁷

Identify patterns

Your capacity to orient (and reorient) is based on your ability to observe weak signals and put them together to identify patterns. In his book The Pan-Industrial Revolution,⁴⁸ Richard D’Aveni foreshadows the rise of a new sort of commercial entity. He argues that technologies like additive manufacturing or 3-D printing will expand beyond disrupting individual industries and will dismantle the concept of industries as we know them. Firms will be able to produce bicycle parts one minute, then automobile equipment the next. Later that same day, they might make parts for ships or drones. What should we call a company that can make all these things? Pan-industrial is D’Aveni’s term, and he argues that firms need to be able to quickly flex and adapt the scope of their business.

Innovate around the core

While orienting yourself to observed changes may seem dizzying, computer scientist and organizational theorist, David Robertson offers reassurance that innovation is closer and easier to grasp than it appears. Rather than being a sudden stroke of creativity, innovation is often about observing the customer experience and rethinking how you work the products and solutions you already have into addressing seemingly incremental customer pain points. He argues that Steve Jobs was not a disruptor and that the iPod was not intentionally a product to revolutionize music; Jobs simply realized that life was becoming more digital and difficult to manage, so he helped people bring their music into the Mac system to be organized. To inspire continuous transformation, Robertson recommends observing what people are trying to do with your product and digging down to find out how you can help them to get more value out of it.

Key questions and exercise

1. Just as addicts will not seek rehabilitation until they reach “rock bottom,” you and your team’s creativity will remain bottled unless you reach a point of discontent. The easiest way to achieve the requisite discontent is to assess your future from an detached perspective. Ask yourself:

• What would an outsider say our future looks like?

• How would an outside analyst project our future revenues and profits?

• Does the future to which you are headed inspire you?

If you find the imagined future uninspiring or, better yet, scary, rejoice, because you now have the chance to design a new one.

2. Next, imagine your desired outcome. Disregard past performance and the previous questions, and answer the following:

• Where do I want my organization to be in the long term? What will our company and industry look like? (I have found five years to be appropriate in most situations.)

• What three key metrics will indicate that we’ve achieve our long-term vision?

• What is our near-term ideal? What must be true in the near-term for us to know we will realize our long-term ideal? (In most cases, the near-term is six to twelve months from now.)

• What metrics will capture our near-term ideal?

3. Consider the gap between your current and near-term ideal. What strategic question, once answered, will lead you to achieving your near-term ideal? It should be specific, measurable, and have a definite time limit. For example, Tesla’s strategic question asked, “How can we double the number of electric vehicles sold in the world and ensure that 80 percent of them use Tesla technology in three years?”

4. Once you have your ideal vision in place, dissect your challenge. Think carefully about what you need to do to get to your near-term ideal, and break the process into steps. You should feel that if you accomplish everything listed, you will achieve your goal. In the Tesla case, the company might break down the problem into three pieces: technology, cars, and drivers. The rationale for this breakdown is that as long as we can get our technology into enough electric cars and get drivers to buy them, we can double electric vehicles sold and achieve an 80 percent share.

5. Continue to break down your processes until you have identified a leverage point that you have not considered before. Select one key issue to focus on immediately.

6. The more options or solutions you and your team recognize, the more likely it is that you’ll find one that works. Examine your challenge and write down all possible resolutions. In my workshops, participants often generate between 50 and 250 possible ideas. Don’t discount ideas even if they seem foolish or impossible.

Decide

Now that you have created lots of ideas, your next challenge, the third part of the OODA cycle, is to decide which ones you will execute. Your goal is to reach strategic clarity and ensure that you have chosen the most disruptive strategy. Be careful not to ask, “Which ideas could I see working?” By triggering this visualization process, you are really asking, “Which ideas have I seen work in some other context?” This usually leads you back to the most obvious or familiar solution and will not result in the transformative innovation you desire.

Technology can be supportive in helping us avoid falling back on old ways of thinking. Artificial Intelligence expert, Ash Fontana proposes that AI can be used as a tool in decision-making.⁴⁹ In many cases, employing AI can help you decide more quickly or more confidently. Ask yourself, could AI and automated processes help me to make the decision I need to make better than I can make it right now?” By leveraging technology to your advantage, you can avoid most human error caused by fear or other emotions.

Key questions to ask

Given the future we desire, what options should we consider?

For each idea you generated, ask:

• What is the impact if we could successfully execute this idea?
• How easy will it be for us to execute?

Pick three to seven ideas that you are committed to either executing or validating.

Act

Now we come to the final crucial element of the OODA cycle. Your strategy is not what you say you will do; it is what you do. You have not created a strategy unless your intentions are translated into actions on the front line. In the end, what you do — how you treat your customers, from where you source your product, through which channels you distribute — must match what you intended.

The final step involves aligning roles, measurements, incentives, and communication. You must redefine roles to ensure people are able to take actions on the front line that are consistent with your new strategy. You then establish a set of measures to judge how well you are succeeding or failing.

Many of the strategy executives I work with note that the measurements used to judge transformation efforts should not be the same ones that judge the success of existing operations. Transformation by its nature requires risk and failure. Align incentives that reward these unique innovation measures. Finally, develop a compelling message and communication plan to ensure that all stakeholders are familiar with your new strategy.

Key questions to ask

• Which key stakeholders will be involved in deciding whether to act on your idea?
• How easy is it for you to influence them?
• What is their current disposition to your idea?
• What do you know about them?
• What message will encourage them to do what you want them to do?
• How can you engage them with your message?

Repeat

You have now transformed your strategy. But you are not finished, because the loop never ends. You observe the results your new strategy is producing, orient yourself to whether you are winning, brainstorm options and decide which to pursue, and act on your new strategy again. And again.

Hudson’s Bay did not out-survive almost all other North American companies of its age through its deft adaptation in the early 1800s. It has cycled through OODA loops many times over the years. Companies that establish the capability to work through this process creatively and quickly do not only survive — they turn change into their competitive advantage.

About the author

Dr. Kaihan Krippendorff is the founder of the growth strategy consulting firm Outthinker. A former McKinsey & Co. consultant, he is the author of five business strategy books, most recently Driving Innovation from Within. He was named on the Thinkers50 Radar list of the most exciting up-and-coming thinkers.

Footnotes

40   https://www.canadiangeographic.ca/article/untold-story-hudsons-bay-company

41   Grant T. Hammond, The Mind of War: John Boyd and American Security (Smithsonian Books, 2001).

42   https://www.honhai.com/en-us/press-center/events/monthly-revenues/583

43   https://www.ritamcgrath.com/wp-content/uploads/2019/03/Snow-Melts-From-The-Edges.pdf

44   https://www.fastcompany.com/90658779/how-walgreens-and-walmarts-new-banking- ventures-will-shake-up-finance?partner=rss&utm_source=twitter.com&utm_ medium=social&utm_campaign=rss+fastcompany&utm_content=rss

45   https://blog.aboutamazon.co.uk/shopping-and-entertainment/introducing-amazon-salon

46   https://www.cnbc.com/2021/08/03/elon-musk-photos-show-spacex-rolling-out-starship- rocket-booster.html

47   https://outthinker.com/wp-content/uploads/2021/03/a-manual-for-outthinking-the- competitionv3.pdf

48   Richard D’Aveni, The Pan-Industrial Revolution (Houghton, Mifflin, Harcourt, 2018).

49   https://outthinker.com/podcast/?wchannelid=jxermuwnpf&wmediaid=03zrg7emsx