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CHAPTER III - The Secrets of Being Big and Innovative

There is general agreement that small companies, especially when they are in start-up mode are often highly innovative, both out of inclination and necessity. Most start-ups are motivated to do something new, to bring something new to the marketplace, which requires innovation. Because everything a start-up does is for the first time, it is necessary to invent all sorts of things, which requires innovation. And the relative lack of structure of small companies means that there are few rules or structures that inhibit innovation. It is perfectly normal to expect everyone involved to pitch in and do what needs to be done, with little regard for titles or qualifications. As companies grow and mature, however, the freedom to innovate typically gets circumscribed. In extreme cases, where bureaucratic systems dominate, innovation may require heroic effort.16

So, how possible is it for organizations to get large, even very large, and remain innovative? The Roundtable heard from representatives of two iconic tech companies—Salesforce.com and Google—founded within a year of each other, both highly successful and widely recognized for their ability to grow and continue to innovate. In both cases, the presentations focused on the culture of the organizations and how it encourages, even demands that all employees pursue innovation.

The Salesforce.com Story. Founded in 1999, Saleforce.com has grown into a sizeable company with more than 12,000 employees and annual revenues of more than $4 billion. In 2012 and again in 2013, Salesforce.com was ranked by Forbes as the most innovative company in the world, which suggests that the company is doing something—or several things—right. The company has set a goal of reaching $15 billion in annual revenues while keeping its culture and values intact.

Peter Schwartz explained that he was attracted to the company because it represented an entirely new type of organization. Under the leadership of Founder and CEO Marc Benioff, Salesforce.com has been built around a series of strategies and values that support engagement and promote innovation at every level of the company:

  • Transparency: every employee is encouraged to watch the meetings of top management, including their decisions on budgeting. Through the company’s internal social network, employees are able to comment on what they are seeing and hearing in real time. As a result, “everyone knows everything that is happening in the company. There are no internal secrets.”
  • V2MOM Planning Process: The acronym stands for:
    • Vision—what you want to accomplish over the next 12 months
    • Values—why your vision is important
    • Methods—what you are going to do to achieve your desired goals
    • Obstacles—the challenges, problems and issues that need to be overcome to be successful
    • Metrics—how you will know if you have met your goals.
    The acronym describes the elements of a planning process, developed by the Salesforce founder, which is intended to create clear alignment around goals, strategies and tactics throughout the company. Each year, an overall V2MOM is presented to the company’s top 400 employees, debated, redone and then agreed to, with the rest of the company watching the process. Then every employee develops their own version of V2MOM and publishes it for review and comment by the entire company. Discussions focus mainly on methods, what everyone is going to do to reach their goals. The result of the clarity that the process produces is a high level of autonomy for every employee, with relatively less need for vertical control. The company has no organization chart and job descriptions can change in a period of months or weeks, depending on what is going on.
  • Generosity: The company relies on its own enterprise social network, Chatter, to allow employees to communicate and help one another. The network gives everyone in the company access to what everyone else knows. For example, Schwartz used Chatter to get a dozen good examples for a presentation he was preparing in just a few hours.
  • Adaptability: Salesforce.com puts a premium on the capacity to change to meet changing conditions. The ability to adapt to a current reality is more important than preserving existing systems or relationships. The environment inside the company permits autonomy and recognizes and rewards initiative.
  • 1/1/1 Philanthropic model: One percent of the company’s equity is used to fund charitable contributions, one percent of every employee’s time (six days per year) is donated to support good causes, and one percent of the company’s products are provided free to non-profit organizations. According to the Salesforce.com Foundation that administers the program, “Since our founding, we have given over $53 million in grants, 580,000 hours of community service, and provided product donations for over 20,000 nonprofits.” The company has also actively encouraged other companies to adopt this model for its own philanthropic activities. Schwartz explained that this policy works as an effective “sorting mechanism” for employees: those who do not like it or are uncomfortable with an emphasis on generosity leave the company.
  • Power of Platform: Even though Salesforce has been identified as the world’s most innovative company, in fact, it actually creates almost nothing. Its most important innovation is to build a platform that allows users to innovate on it, to create new applications that others can pick up and use. Salesforce.com launched its AppExchange in 2006. By 2011, the exchange reached one million downloads and two million in 2013.

The Google Story. Perhaps the quintessential success story of the past several years is Google, which was founded in 1998 (one year before Salesforce.com) and has annual revenues of $60 billion, which represents approximately one-third of total worldwide spending on online advertising, and more than ten percent of all advertising expenditures globally. Jeff Huber, Senior Vice President at Google (no relation to Peter Huber), followed Peter Schwartz by describing Google’s “top ten secrets of innovation.”

  1. Have a mission people know and care about. From the company’s earliest days, its founders stated that its mission was “to organize the world's information and make it universally accessible and useful.” While the way the mission has been pursued has evolved from organizing Web pages to creating Gmail and Google Maps (both of which Huber worked on), the core mission remains unchanged and proves to have universal appeal.
  2. Start with users’ problems. Even though most people cannot tell you what they want that they do not have, they can tell you what their problems are. The company’s most successful products have all been based on solving its users real problems.
  3. Hire generalists, not specialists. Because the company is growing and changing so fast, it is very difficult to identify a specific set of skills that are needed to fill a specific role. As a result, job descriptions are stated generally. To decouple the hiring process from a specific role the company follows a policy of “late binding” where job assignments are not made until after someone is hired. The amount of structure in the company is kept to a minimum, and employees are expected to take the initiative in taking on projects that need to be done or tackling problems that need to be solved.
  4. Data-based transparency. An all-company meeting takes place every week. Every three months a meeting is held in which the results of the previous quarter are reviewed and top priorities for the next quarter are outlined. Virtually all corporate information is accessible on the company’s intranet (with the exception of two groups: Android, to protect confidentiality agreements with partners, and Google X, to protect the freedom to explore new initiatives that the company may or may not decide to pursue). OKRs— statements of Objectives and Key Results—“cascade down from the top of the company to individual divisions and teams.” This methodology, which Google adopted from Intel, includes formulating ambitious but measurable objectives, while Key Results identify precisely how progress toward meeting the objective will be measured.

    Elements of an OKR

    The Objective
    • is ambitious
    • feels a tad uncomfortable
    The Key Results
    • clearly make the objective achievable
    • are quantifiable
    • lead to objective grading

    Source: www.businessinsider.com/googles-ranking-system-okr-2014-1

  5. Small teams that demo and iterate. Even though Google now has more than 50,000 employees, its product teams are kept very small. For example, the core team responsible for Gmail consists of 15 people. Within Google X, teams range in size from one to two people up to six. There is a strong emphasis on demoing ideas rather than talking about them. The company is rigorous in culling ideas to pursue: there are a number of internal mechanisms, both from the top down and the bottom up, to kill projects that are not sufficiently promising. In the early stages of a project, it is acceptable to do “hacky” things that are not polished or complete, but Google knows that when it launches a new product, it is likely to be quickly adopted by large numbers of users, which means that it must be very robust at launch.
  6. Twenty percent time. Anyone in the company, and especially engineers, are free to use 20 percent of their time to pursue their passion. They can use the time to develop and demo an idea and recruit others to work on it. Employees can use their time in different ways—by taking one day a week or saving up time in order to dedicate a full week to a personal project. This approach has been the source of many successful ideas, including Google News, which was originally developed after 9/11 by a research scientist to help himself keep up on news stories happening around the world.
  7. Portfolio model. The company allocates 70 percent of its resources on its core activities, 20 percent on adjacencies, and ten percent on “crazy new ideas.” At both the company and the individual level, the ten percent for crazy ideas serves as a “forcing function” to maintain an edge that keeps people from becoming too comfortable.
  8. Set high expectations but measure progress. A typical rejoinder to a new idea from the company’s founders is, “You aren’t thinking big enough.” But no matter what is being proposed, it is necessary to measure results regularly.
  9. Provide a platform for others. Much of Google’s success is based on providing platforms on which others have been able to add value by creating new applications. Google Maps and Google Earth each attracted more than one million developers who made use of the geographical information they provide to develop uses linked to specific locations. The Android operating system is used by 50 different manufacturers who use it to power their mobile devices. Google Play, the online marketplace for Android apps, has more than one million apps, nearly all created by third parties, that have been downloaded more than 50 billion times. Google Glass, one of the company’s newest ventures, was explicitly designed as a platform for the development of apps for wearable devices. When prototypes of the device were first made available to developers in April 2013, Google also released an API to facilitate the development of apps.
  10. Set expectations. At Google, the expectation is that innovation is the rule, not the exception. When considering a new idea, everyone is encouraged to ask, “Is this something that only Google can do?” Even when there are other similar examples in the market, the goal should be to try something new, to do something distinctive.

There are obviously similarities between the two lists, especially in terms of keeping all employees aware of and aligned with the firms’ goals and engaged in and challenged by their work. To do so, both companies are deeply committed to maintaining transparency in almost every aspect of their operations. Both employ planning processes that put a premium on explicitly defining goals and establishing clear metrics for measuring progress toward those goals, which maintains individual accountability. Both see themselves in the platform business, which gives others, including users, a stake in the success of the company. And both are remarkably open with sharing the “secrets.”

But does this approach to operating carry over to other companies? How feasible is it for an “ordinary” company to adopt these strategies, and if they do, how likely are they to lead to success?”

Irving Wladawsky-Berger suggests that, “You can only be a child for so long, then you need to grow up.” Over time, companies acquire a legacy based on brands, customers and ways of operating. Companies need to evolve to adapt to the circumstances they find themselves in. IBM, famously, went through a major transformation after it went through its “near death experience” in 1993, when the company lost $8.1 billion, the largest annual loss in corporate history to that date. Under the leadership of CEO Lou Gerstener, IBM changed its fundamental business strategy from leasing large computer systems to focusing on software and systems integration. As a result, IBM remains one of the largest and most profitable companies in the world. It was ranked by USA Today as the most innovative company in the world, based in part on the fact that it was awarded more patents than any other company in 2013. At the same time, Wladawsky-Berger noted, other companies who had good CEOs have been unable to make the transition and have tumbled from the ranks of leading companies.

Jeff Huber maintained that there is a “strongly wired fear of legacy”—and its power to favor conservative decision-making—within Google. The company is committed to cannibalizing itself, to be the first to come out with the next generation of a product, even at the expense of the existing product. Initiatives like Google X are intended to help the company keep its edge, the result of a conscious decision to keep investing in “crazy things” that just might pay off or change the world.

But will even Google be able to stay like Google and will Salesforce stay like Salesforce as they continue to grow? Thomas Malone pointed out that as companies get bigger, it gets harder and harder for them to “keep weird ideas going,” which may just turn out to be their next major success. No one really knows the formula for keeping the virtues of a start-up intact as a company matures.

One key seems to be to preserve a company’s core values even as it grows and changes, which is easier to do when a company is being led by a strong, charismatic leader. John Seely Brown noted that companies where founders continue to play a conspicuous leadership role, which is still the case at both Google and Salesforce, seem to be “surprisingly insulated” from the demands of Wall Street for predictable results and steady growth. Amazon, another company where the founder remains very much in charge, has made moves that were deeply unpopular with investors, yet the company has been able to do well in the long run. In some cases (like Facebook and Google), the structure of stock ownership gives founders with a large ownership stake power that leaders of older companies do not have.

It is also true that investors can provide companies with a sense of discipline that can be useful. Ken Cukier, Data Editor of The Economist, recalled that 25 years ago, Japanese companies were poised to dominate the world economy. There was a whole cadre of companies created after World War II, with strong leaders who had access to cheap capital and virtually no pressure from stockholders. What seemed at the time to be huge advantages, however, turned out to be deficits when the Japanese economy turned down and the companies, without the discipline that outside investors would normally bring, stagnated. Once the firms’ founders left, the companies could not maintain their discipline, and slowly went broke (though most of them continue to function).

One of the strengths of capitalism, after all, is supposed to be the process of creative destruction that continually winnows out the enterprises that are no longer viable and creates space for the emergence of new ventures. As Irving Wladawsky-Berger commented, it is up to the marketplace to decide that a company is more valuable as a carcass to feed start-ups than as a going concern. Part of the discipline of the marketplace is to keep you paranoid: you may be doing well at the moment, but one day, your time will be up and you will need to make way for others.
But, as Robin Chase added, capitalism is also about becoming a monopoly. Google and Amazon have become natural monopolies. For the moment, they face no serious competitors and no one is willing to fund a potential competitor to them. But what will happen if the tech companies that are doing well now encounter real difficulties? Do they have the resilience to change? It has been suggested that one reason that Apple has held on to a vast amount of cash ($160 billion as of March 2014) is that it had gone through its own near-death experience in the mid-1980s, and is now institutionally averse to taking actions that would make it vulnerable again.

Can a company’s long-term view get a it through short-term problems? Peter Schwartz’s job at Shell involved articulating a long-term vision for the company. They developed and then announced their strategy, which was largely driven by the value of a barrel of oil. Even when that value went down, the company was not punished by Wall Street, since it retained trust in the company’s viability over time. But Google has been successful with a very different approach: rather than having a long-term plan, it puts its faith in its ability to keep iterating quickly to respond to both opportunities and challenges.

Unfortunately, many established companies do not do a very good job of expressing their values. There are some outstanding companies that have strong, well-articulated values (Johnson & Johnson, Procter & Gamble, American Express), but they are exceptions. In fact, David Kirkpatrick, Founder and CEO of Techonomy Media, cautioned about assuming a direct causal linkage between a company’s culture and its commercial success. He suggested that successful companies like Google, Salesforce and Apple may be the result of flukes—having the right product at the right time—that produced the extraordinary resources that enable them to pay for the culture they want. In other words, their economic success may be responsible for their distinctive cultures, rather than the other way around.

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