While attending the Fortune Brainstorm Tech this year, I heard from leading executives of companies like Walmart, Mattel, Ford, Intel, Qualcomm, Target, Macy’s, and others on a wide range of topics, including the challenges on leading digital transformation and innovation. Most of the top executives from mature incumbent companies outside of the tech space amplified the extreme challenges and impediments put forth in The Incumbent’s Nightmare. Transformative innovation—often thought of as digital transformation—is extremely difficult for incumbents, as markets have given companies like Amazon and Google an incredible and unfair advantage. Though some incumbents are making strides, very few have done it successfully at scale, with most companies running into these issues:
– low tolerance for any significant investment in experimentation and innovation outside the core
– low tolerance for risk taking
– cultures resistant to and not rewarding innovators
– short term fixes to bulk up financials, e.g. M&A
The discussions were robust, and the speakers were transparent about the challenges their companies face. Out of the different topics discussed, the greatest agreement and passion from attendees were around four major challenges:
Mature companies outside of the tech space do not naturally experiment, learn and pivot. It is absolutely critical that these companies develop this muscle, as it’s this skill deficit that’s causing them to struggle, according to Macy’s Chief Digital and Revenue Officer Jill Ramsey.
Digital transformation – which lives in the heart of innovation – is not about technology, but about new ways of working, culture and mindset shifts. Minsok Pak, the EVP and Chief Strategy & Innovation Officer for Target, articulated this especially well.
Mature incumbents struggle to compete because they’re hammered on profits, whereas companies like Amazon are rewarded for hyper growth over profits. Walmart’s CEO is under pressure for e-commerce losing $1 billion, despite good growth. Meanwhile Amazon faces no such pressure. The balance and acceptance of shareholders is extremely hard to get right in incumbents. Walmart CEO Doug McMillon freely admits that they’re playing catch-up with Amazon and noted the traits he most admires about Amazon are its speed, its innovation, and its customer centricity.
Mature companies use AI to help lower costs, and tech companies use AI to create new value and start new businesses. This was obvious in the ways that executives both types of companies spoke throughout the event.
The constant dilemma faced by mature, non-tech incumbents like Walmart is balancing investment between the core and transformative innovation, which is a battle each and every day. The table is unfairly set, as incumbents have to deal with shareholder and market expectations. They expect dividends and minimal risk and have a very low tolerance for the experimentation and its necessary costs to get to key learnings and innovations. Amazon, as a proxy for large tech companies, benefits from the opposite expectation of equity growth over dividends and a high appetite for risk and experimentation – and a stomach for its associated costs.
These challenges were essentially the reason that Ford acquired the tech start-up Argo to underpin its development of autonomous solutions, according to Ford’s Chief Technology Officer Ken Washington. Today Argo is operating as an independent subsidiary of Ford and has a pre-revenue valuation of $7 billion, almost 20% of Ford’s total valuation of $37 billion.
Customer centricity as a strategic focus was a prevalent theme throughout, with its four pillars of convenience, choice, personalization, and customer experience. Tech companies, both large and small, had a much better temperament and approach than mature incumbents when it came to customer centricity. Intuit’s CEO hammered this home when he said Intuit was not about Intuit’s technology, but about falling in love with their customer. This mindset of customer-centric innovation and designing to delight have enabled Intuit to successfully make three major transitions over the life of the company.
Now the innovator’s dilemma has become the incumbent’s nightmare. Incumbent leaders seem to be stuck – they’re constrained by the markets, whereas massive tech companies are set free to innovate and experiment. Incumbents have to defend and optimize their core, while also investing in its own disruption before someone like Amazon comes along and does it for you.
We need to completely rethink how we design and execute transformative innovation – including digital transformation – in mature companies, including the organizational design/culture shifts and how digital tools can increase the effectiveness and impact of these efforts. The innovation leaders that will see success in incumbent firms are those that recognize the effort needed to make the necessary culture, work and process shifts, and do not minimize these efforts in order to focus on the core.
Read more: Funding Digital Transformation