VideoSix years ago, at the height of the reengineering revolution, Gary Hamel and C.K. Prahalad informed Corporate America that it was headed in the wrong direction. In Competing for the Future--perhaps the most influential book on strategy of the 1990s-- they argued that innovation, not efficiency, was the path to greatness. The goal, in a nutshell, was to get to the future before anyone else did. Only by creating new businesses, and reinventing existing ones, could companies become dominant market leaders.
Today, Gary Hamel has a new book on strategy for a new, dot-com decade. In Leading the Revolution, the 45-year-old management consultant urges companies to "go nonlinear" and create not just new products and services, but also new business concepts capable of producing enormous wealth. Innovation, Hamel proclaims, is too important to be left to the visionaries. Like quality, innovation should be everybody's responsibility, systematically fomented throughout the workforce.
What's more, says Hamel, Silicon Valley shows us how the future can be conceived and financed. Venture capitalists keep an eye out not for the incremental sure thing, but for the billion-dollar new thing. They nurture portfolios of projects, and they don't demand high probabilities of success. They fund ventures in small, rapid stages and are ready to scale up investments at a moment's notice.
All this is foreign to the capital budgeting process at most companies, says Hamel. Is the traditional finance function the enemy of change? Do CFOs need to become more like VCs? Last July, CFO New York bureau chief S.L. Mintz posed these questions and others to Hamel in the Menlo Park, California, office of Hamel's consulting firm, Strategos.
What have you been helping your clients with lately?
A lot of what we've been doing in some very substantial companies is creating new mechanisms for resource attraction. How do you re- create some of the wealth creation, energy, and passion inside of a company that you see in Silicon Valley?
There is a distinction between resource attraction and resource allocation. In most companies, one of the critical roles of the CFO is allocating resources across businesses, projects, and so on. That process works pretty much like it worked in the old Soviet Union, in that somebody has an idea and you have to fight that idea up through levels of uncomprehending management.
If you look at the way Silicon Valley works, there is no giant brain or CFO of Silicon Valley saying, "We're going to put this much money in this sector and that sector." Somebody throws out an idea, it gets considered by all sorts of sources of capital. If the idea has merit, it attracts capital and talent. If it doesn't, it just dies.
I sense a thinly veiled hostility to CFOs in Leading the Revolution. For example, you write, "The next time you're thinking about how to turn the world upside-down and someone asks you for an NPV, take a minute to educate them on the difference between a strategy conversation and an operational conversation. Then tell 'em to cut you some slack." Elsewhere you say, "Venture capitalists are not financially stupid people, but they sure don't think like CFOs." You seem to be using CFOs as an emblem of people who aren't open to ideas. Do you think that's true?
I'm less trying to point a finger at CFOs than using them as a symbol for how we've managed large companies. Industrial Age companies are very, very good at efficiency, at diligence, at replication. What I'm trying to point out as kind of a thesis and antithesis is the distinction between Industrial Age companies and the kinds of companies that are going to be capable of surviving in this new world.
Today, a lot of wealth creation is driven by creativity, imagination, radical new business concepts, experimentation, self-organization, and complex networks of firms. And so almost everything that seems to be important now in the new economy is in some sense almost antithetical to what helped companies in the old economy.
Traditional financial controls are extremely valuable in driving inefficiency out of existing business models. I think they often get in the way of creating fundamentally new business models.
It sounds as if a CFO who's doing his job in the 20th century is inimical to the interests of innovation.
I believe so. If you go to any CFO and ask, "Have you done a systematic review of your management processes to understand where and how they frustrate innovation? " not 1 in 50 is going to say yes. Over the last decade, just about every company I know tore apart most of its core business processes to try to make them more efficient. The issue going forward is reengineering management processes for innovation. I think it's going to be every bit as hard work as reengineering our supply chains.
How do you institutionalize innovation?
The analogy I would use is this. If you went back to the mid- 1950s and asked someone where quality came from, they would have said either the artisan or the inspector. Either it was the person on [Savile Row] that made you a beautiful handmade suit, or it was the inspector at the end of the Mercedes production line-- the guy in the white lab coat.
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