Executive Thought Leadership

High Speed Highway to Innovation

Master business strategist Gary Hamel talks about how the Internet is changing society and what it takes to be an innovative business.

Known the world over as one of business's leading thinkers, Gary Hamel has created, written, and spoken about some of the most influential business concepts of the past two decades. Along with his colleague and coauthor, C.K. Prahalad, Hamel challenged management to live by a new paradigm of success with the book Competing for the Future (Harvard Business School Press, 1996), which has been an international best seller.

In his new book, Leading the Revolution (Harvard Business School Press, 2000), Hamel shakes up the management model once again by emphasizing the role of imagination in shaping future-winning business practices, models, and direction.

Hamel has been a four-time award-winning contributor to the Harvard Business Review and is currently a visiting professor of strategic and international management at the London Business School. As chair of Strategos, a professional services firm that helps companies increase the rate and quality of innovation within their businesses, Hamel and his colleagues have advised some of the world's largest and most successful companies, including Ford, Nokia, and Shell.

The editors at iQ recently spoke with Hamel about where he sees the greatest opportunities for small and large businesses and what it means to reinvent an industry from the customer backward.

iQ: How do you think high-speed Internet technologies will change the way people use the Internet?

Hamel: I think that ultimately people are going to feel that they have a right to information where they want it, how they want it, when they want it, all the time. Today that's not the case. As I'm sitting on an airplane today, I can't research the next article I'm writing. As I'm sitting in the back of a taxi, I can't check out the latest episode of Ally McBeal. There are lots of places today where we basically are in an information blackout zone. The opportunity for Cisco and other companies in the industry during the next few years is to erase those blackout zones so that we are connected, informed, and in touch everywhere, all the time.

iQ: What do you think will be some of the social impacts of technologies such as wireless?

Hamel: We already see some of the impacts, but we're just at the tip of the iceberg. For example, I was recently in Finland talking to the chief executive of a telecommunications company who told me that 25% of Finnish girls now break up with their boyfriends using short messaging service. Who would have thought that? He went on to say that it's now possible, if you're sitting in a bar or a pub somewhere and you want to find a good opening line to use on someone of the opposite sex, to download one of these chat-up lines (as the British would call it) onto your mobile phone. Clearly people are inventing everyday uses for this technology that are imaginative and that we wouldn't even have conceived of a few years ago.

I think it's important to say, however, that the sociological impact is not necessarily all good. It's easy, particularly living in the parts of the world we live in, to get a fairly Pollyannaish view of the difference that technology will make. One of the things that is becoming possible is for us to simulate any experience that we can imagine. Indeed, already for our children the line between reality and "virtuality" is disappearing. You see a game like Ultima Online where the average player will stay connected to this fantasy world for as long as six hours at a time, and that's going to have interesting repercussions. Never before has it been possible to render as real literally anything that we can imagine. So, like all things, we have to be careful that as we improve our tools we also improve our purposes.

iQ: What would you say is the biggest opportunity for small businesses today?

Hamel: Large companies historically had informational advantages and access that small companies simply didn't have, by virtue of the larger company's global infrastructure, deep-standing relationships with suppliers, and so on. New technology levels the playing field in many respects because information is more readily available. It's much easier to find suppliers and buyers around the world and form those relationships. Technology is an area that [exemplifies] the trend I've talked about in my writing, where incumbents don't have quite the advantages they used to have. The Internet is a powerful force in evening the disparities and bargaining power and global-distribution access that historically worked to the advantage of large companies.

iQ: What would you say are the biggest opportunities for large-enterprise companies?

Hamel: My concern is that so many large companies up until now have basically looked at the Internet as simply one more efficiency tool—as reengineering on steroids. The reason many CEOs have embraced e-business so enthusiastically is they see it as one more way to reduce working capital, to cut inventory, to replace people in their call centers and on their technical help desk, to bring better control over internal processes, and to cut costs from administrative functions. All of that's great, but to me that's a first-order impact. That's kind of paving the cow path, if you will. What remains to be seen, and what we can only speculate about at the moment, is how the Internet will change both the structure of companies internally and the relationships between companies.

There has been a long-term trend, probably for the last ten years, of companies focusing more closely on their core competencies and outsourcing things that are not core. Technology is going to accelerate that. Obviously, as you reduce the cost of communication and you reduce the cost of coordination among different players in any kind of a value chain, there's a strong incentive or force there to create ever more kinds of virtual business webs. It remains to be seen how far that trend can be pushed, but clearly that's the direction in which we're going.

One of the questions every company must ask itself today is, "What really is the essence of my organization? Where does the fundamental core of my competitive advantage lie?" And that question does not always have an obvious, easy answer. We work with a lot of companies to help them find those competencies—what do you hold on to, what do you protect. I believe that the very definition of a company will increasingly revolve around some core set of knowledge that is constantly exploited in new and creative ways. Anything that is non-core is done outside the boundary of the organization.

iQ: You talk a lot about radical business concepts and new wealth creation in Leading the Revolution and, as you are aware, the service providers are going through a rapid transition and redefinition of themselves. What would you say are their biggest opportunities?

Hamel: Some people believe that you have to control both the full width of content and distribution. I'm very skeptical of that argument. I think it's interesting that in almost every other industry outside of telecommunications and media, companies are de-verticalizing. And media/telecom is one of the few cases where folks seem to believe that if they can control content, somehow they'll have a lot more bargaining power over the channel. I just don't think that's true. I don't believe that the users of the Internet will ever accept somebody telling them where they can go and what they can do—it's almost antithetical to the spirit of the Internet. What the Internet is about is the ability to bundle and unbundle content in all kinds of different ways.

iQ: Companies that embrace the Internet have been known to increase productivity fourfold. Do you think that network effect will continue to increase?

Hamel: There's a very important distinction to be made between productivity growth and earnings growth. As a company I can dramatically increase my productivity, but that does not necessarily translate into earnings growth. Because if all my competitors are increasing their productivity at more or less the same rate, and customers are getting more bargaining power by virtue of the new technology, then much of that productivity gain may simply be competed away. [One] way to play against that is to be an early adopter—use the technology first. The second way is to use the technology in a way that is completely novel to create a new business model and positive change in customer experience.

Like any other business tool, the tool is not important. The question is, what do you do with the tool? It's not the "e" of e-business that counts. It's the "i" of innovation—how you apply it—that is going to matter. Some companies will apply it in novel ways to great competitive advantage, and some will be in the back seat trying to catch up.

iQ: What would you say managers should be thinking about doing to foster innovative business concepts?

Hamel: To me, the most powerful opportunity enabled by the Internet is this: It is going to enable us to reinvent industries from the customer backward. For at least 30 years, people have talked about being market led and customer led, but the tools didn't really let us do that. Even now that we have many of the tools, most managers aren't really so deeply in touch with the customer experience that they know how to apply the technology in ways that will truly help reinvent an industry from the customer backward.

Here are two contrasting, practical examples of how Internet technology can be used: I can, in the middle of the afternoon, go online and order something from Amazon.com or any other e-commerce company. The next morning a box will arrive on my doorstep that has the set of videos, CDs, DVDs, or whatever it is that I ordered. That's the power of technology, plus an amazing logistics system behind it.

Yet, when I get on an airplane, there are essentially two classes with completely undifferentiated services within those classes. So what I ask is this: Why can't I, when like the cheap meal, the expensive meal, the gourmet meal, whatever I feel like. Why can't I tell them whether I want someone to meet me and help me with my bags off the aircraft? Why can't I choose a caffeine-free Coke instead of a regular Coke if I want that? The airlines will say that's impossible, but I don't believe it. If Amazon.com can, with less than 24 hours notice, deliver a unique bundle of products to my home, why can't an airline do the same? Airlines have at least as much control over their logistics as Amazon.com does over its logistics. The reason this hasn't happened has nothing to do with the availability of the technology; it has to do with the fact that most executives truly are not living inside their customers' skin.

I'll give you another example. Recently supermarkets have started to introduce loyalty cards, and mainly what they do is, at the end of the year, give a kickback or specialized coupons related to what you buy. One of the things I learned a few years ago was that the top 25% of buyers in a supermarket spend 50 times as much in a year as the bottom 25% of customers. Yet when I go to a supermarket I see a line for ten items or less, and in that line are generally your worst customers—the guy in line with beef jerky, cigarettes, and malt liquor or something. Then I, someone who comes in loyally and spends a lot of money and has an overflowing shopping cart, I'm standing in this long line. And my question is, where is the line in the supermarket for people who spend $5,000 or more in a year?

So supermarkets, banks, and so many institutions out there have not yet used the information they have about customers to really differentiate service. What they tend to do is use the information to cross-sell, to entice me to buy other things; they use it to try and wring more money out of my pocket, but they're not using it by and large to really change and differentiate the customer experience. So there's a huge opportunity that will slowly work its way across every industry, and for the first time we really can invent industries from the customer backward. That's one enormous effect the Internet is going to have in the long term.