How do you foster a culture that lets innovation thrive in an organization? On this episode of Mastering Innovation on Sirius XM Channel 111, Business Radio Powered by The Wharton School, we asked guest Terry Fadem, Senior Fellow at the Mack Institute, about his experiences accelerating growth in both the academic and corporate worlds.
Fadem shared his top success strategies, such as asking incisive questions and forging strategic alliances. He also described the importance of understanding and tolerating risk, emphasizing that inaction is itself a risk. Above all, Fadem underlines how the prevailing component is still the people behind the innovations, and sees social media as a resource that has yet to reach its fullest potential.
A lightly edited transcript follows. Listen to more episodes here.
Transcript
Harbir Singh: Hello, and welcome. You’re listening to Mastering Innovation, our new show here on Sirius XM Business Radio, powered by the Wharton School. I’m your host, Harbir Singh, Professor and Co-director of the Mack Institute for Innovation Management. I’m thrilled to be joined in the studio by my colleagues and co-hosts for the hour, Nicolaj Siggelkow, co-director of the Mack Institute and Professor of Management, and Saikat Chaudhuri, Executive Director of the Mack Institute and Associate Professor of Management. Coming up in just a few minutes, we’ll be joined by our colleague Terry Fadem, a business development professional and Senior Fellow at the Mack Institute for Innovation Management.
Just to remind you, we’re live every Thursday at 4 p.m. Eastern time, and the show replays a few times throughout the week. The premise of our show is, how do established organizations foster the kind of innovation that keeps them going strong year after year? In that, there’s a central question. How do they innovate, and when do they take charge of the opportunity and not fall victim to disruptive models or new entrants?
As a center studying innovation management, we focus on two dimensions. The first one is really the innovations themselves: the technologies, the new business models, the efficacy, maybe the value proposition to the client or user. The other is on managing innovation. As professors of management, these issues are very salient to us, and there’s a lot of research funded by the Institute on this domain. Some of the issues we talk about are identifying opportunities. This is not as simple as it seems. Similarly, there’s the question of strategizing for innovation. How much of that is an orderly process? How much of that is, in fact, an organic process? How do you harness the creative elements of innovation while still having some degree of leverage and scale?
Then the question of leadership and organization for innovation: many people have suggested that large corporations get disrupted and fall by the wayside. Yet, we see companies that exist for 100 years, and many companies that dominate for a long time. What are the differences? The question we ask is, how do we organize and manage innovation? In particular, how do we incentivize innovators? How do we foster debate? How can we even, perhaps, disrupt ourselves from the inside?
Nailing the Acquisition
A case in point is a recent article in The Economist just last week about Walmart. The stock of Walmart is up 40% this year. The reason is that Walmart has scaled its online business, boosting on the acquisition that it made of Jet.com for $3 billion in 2016. Walmart had been flat for a long time as a stock. It has $83 billion invested in infrastructure, and a lot of people felt that was too much. Its web presence was relatively pedestrian. It’s only now that Walmart is starting to gain traction, and that’s the reason why its stock is up 40%, where the Standard and Poor index is up 18% this year. Almost symmetrically, Amazon acquired Whole Foods this year for $14 billion, and that was to get a physical presence, ironically enough, as a company that made its money online. That symmetry is a very interesting question for us today.
In addition, one of the points made was that Walmart, in 2006, was unstoppable. A lot of people felt Walmart would perhaps monopolize many, many industries. The question now is, what would we do with Walmart’s presence today when it has flattened down in performance? Is Amazon today seen as an unstoppable force? Will they have similar problems down the road? Nicolaj, given your work on organizing for innovation, how can a large firm like Walmart add radically new channels successfully?
Nicolaj Siggelkow: The acquisition of Jet.com was probably really important for Walmart because clearly, as you said, they felt they were behind on the online presence, and it was very, very hard for them to build up those capabilities inside. They tried for a long time. You can maybe create your own innovation center in Silicon Valley to try to hive this off from your existing headquarters in Arkansas, but it’s still quite difficult for Walmart to attract the talent — or it was difficult for them at the time — to attract the talent. Once they bought Jet.com, that was one of the key things. They were now able to actually have a credible presence in the labor market in that arena and were able to attract lots of talent because, in some sense, as you said, the opportunities are gigantic for Walmart to move into this market. For people to say, “Okay. This is a cool opportunity for me to work, and I can really make some impact,” that was really important for them, but they felt like, “I want to be in an environment where I feel comfortable, and I’m not quite sure I’m comfortable working in the typical Walmart environment.”
For Walmart to jump start themselves in that arena, that was important. Of course, that’s not enough. Now, we need to see whether they are actually able to implement those great ideas that come out of that team. Of course, there’s the CEO of Jet.com, who is now the CEO of the online operations within Walmart. They’ve been able to keep that talent around, but it will be interesting to see the operational implications of that whole business.
Singh: Exactly right. One of the interesting questions: it’s all in the execution, right? At least, they have the strategy, and they’ve done something. Marc Lore, who’s going to run this as the former CEO, has actually managed to bring a lot of skill to this new scale. Saikat, you’ve done so much work on innovation and sourcing technology through acquisition. How do you see this set of transactions?
Saikat Chaudhuri: It’s certainly an exciting avenue for growing, as Nicolaj and you were both alluding to as well. A few things that we’ve learned about technology acquisitions is that oftentimes, you’re not just buying for assets and processes, but you’re buying for people. The reason is the capabilities and the resources are not just embodied in traditional things like distribution networks, for example, or other hard assets, but often in the knowledge that these people bring for the future. I think in both of these cases, that applies.
“Oftentimes, you’re not just buying for assets and processes, but you’re buying for people.” – Saikat Chaudhuri
For instance, in Jet.com, clearly Walmart had been trying but struggling compared to other rivals with its online offerings. It’s not just a matter of resources, cash, and inability to attract talent, but really the expertise that comes with that. Paying attention to the people and being able to bring them in is very, very important. Having Marc Lore run not only the online operations, but the entire e-commerce business – not just of Jet.com, but the entire internet business of Walmart – is a very good example. An analogy is, for example, when Disney bought Pixar. John Lasseter and others were put in charge of the entire animation unit. Now, with regards to Amazon, they can take a leaf out of this book. They should pay attention to the key people in Whole Foods because the brick and mortar business is fundamentally different from the standardized operation that Amazon runs.
Singh: These transactions, Amazon and of course Walmart’s transactions as well, are indicative of what’s happening today: that firms are sourcing technology through acquisition. It was seen as risky in the past, but maybe time to market, assets in place, or knowledge in place are some of the reasons why companies are willing to take this kind of risk. We can also think about conditions of when firms can source these particular innovations.
Innovation Management as a Career Path
We’re thrilled to welcome to the show Terry Fadem, who joins us on the line. Terry is a business development professional focused on accelerating the growth of new and innovative businesses. His interest is in speeding up the process of moving ideas to market, which he has accomplished as a leader, both in the academic and business communities. He has founded new businesses, mentored startups, and also maintained a strategic consulting practice. As mentioned earlier, he’s currently a Senior Fellow at the Mack Institute and an Adjunct Lecturer at the Kellogg School of Management at Northwestern University.
He also worked at the University of Pennsylvania’s Perelman School of Medicine as Emergent Director of the Office for Corporate Research and handled a lot of strategic alliances between corporations and Penn. Before that, he was at the DuPont corperation as a director of new business development. He has experience in academia, in the corporate world, and also in bridging the two. Terry, welcome to the show, and thank you so much for joining us today.
Terry Fadem: Good afternoon, Harbir. Thank you. I’m happy to be here.
Singh: With your varied and diverse career, the question I have for you is, how did you start a career in innovation management? What were some of the twists and turns that were most instructive?
Fadem: That’s a good question. Actually, I started the career in innovation management by accident. I was given the projects that no one else wanted because they were either too new or destined to failure, for some reason or another. One example would be when I was at DuPont. At the time, we were working on a biodegradable polymer, which was clearly going nowhere in the marketplace. It was supposed to replace material for diapers we made out of cellulose products. The company had invested a huge amount of money in creating a polymer technology, which the company was very good at, at the time. They didn’t know what to do with it, and they had a group of people.
Instead of getting rid of the project and shutting it down, management, which was good at the time, had a feeling that, “Well, maybe we’ll give it to somebody who will think of something.” I get the project, and the question is, what do I do with it? I had worked in agriculture in one of my employment stops. Knowing that they needed a biodegradable polymer that lasted a very long time in the environment, we ended up in the business of manufacturing the same material except for the agriculture market, which could be used as mulch film or as trash bag containers or other things where degradation is important, but no one wants to take a trash bag out of their trash can and having it degraded on the spot.
It ended up being a good business, and it’s still good for DuPont, that material. There was an old commercial on television where people and kids are trying new cereals. It was, “Well, let Mikey eat it. If he likes it and it’s good, we’ll try it.” That’s the position I ended up being in. Then, what I learned after doing that is that those are the best things to be doing for me. It tended to fit my need to push out in the market in new areas and think about new applications for existing technology. That became my career.
Singh: Terry, as you look at these unexpected applications, maybe you can say a bit more about how the innovator is not just the R&D person. The innovator is somebody who gets the team to be more creative and sees uses of technology that others did not see.
“The innovator is somebody who gets the team to be more creative and sees uses of technology that others did not see.” – Harbir Singh
Fadem: That’s an excellent observation, and one of the key issues I stumbled over, actually, when I ended up in new business development. In a company as broad as DuPont, with as many technologies as they had, one person cannot possibly know enough to be able to make decisions about the technology that are there. The innovative practice that I thought I brought to my job, and later to as many people as possible, is I just managed out of ignorance.
I would go in and start asking a lot of questions. What does it do? How would you use this? People will come up with innovative technologies all of the time that don’t necessarily have a specific market application. They’re working inside of organizations, and they’re doing jobs on a day-to-day basis, and they have all these ideas. Where do they take them? What do they do with them? How do they operationalize them at all? That became my function. I used to manage by walking around, listening to people who would tell me about these great ideas they had. I would ask them a bunch of questions and end up empowering them – some of them, not all of them – because I did run an organization to take that idea and take that technology and move it forward.
There was an innovative idea on ski wax. A guy was playing around with materials in his laboratory, and the company ended up producing materials and selling it off. There were some other ideas that came up about other products. That’s what I ended up doing. The two key features are the ability to sit back and listen to what people are saying. They’re not saying, “Hey, this is the greatest technology.” They’re saying, “I have an idea and an application where I think it can work.” Sometimes they’re unclear about what specifically the problem they’re trying to solve is.
“Listen to what people are saying. They’re not saying, ‘Hey, this is the greatest technology.’ They’re saying, ‘I have an idea and an application where I think it can work.'” – Terry Fadem
The job of the manager, then, is to help that person or that group of people identify the specific application. What is the innovation? Then, be open enough and flexible enough to accept what they’re telling you. In every organization, there’s still all these legacy ideas about what a company should be doing and what an organization should be doing. Just be open enough to entertain the idea of that’s a place we could go. What would it look like? How would we get there? Then, ask the normal business questions on what type of investment it would take to move the market and move yourself in that direction.
One of the really interesting things that I’ve looked at recently is, what are the companies that do this as a normal part of their business? I looked at architecture, which is a business that, if it doesn’t change with the environment, the business is disappearing. Gensler (and I do not work with Gensler, so this is not a commercial for them), they’re one of the largest architecture firms in the world, billion plus dollars. They’re able to respond and integrate new materials and new thinking issues with respect to environmental changes flooding into their business almost on a daily basis, because if they don’t do that, they don’t survive. Lately, I’ve been looking at, what are the lessons you learn from businesses that absolutely have to integrate innovation on a daily basis? Can you move those ideas in the practices around the marketplace?
Invention vs. Innovation
Siggelkow: Terry, as you were talking about this, my question that came up is: what are some of the big organizational obstacles that you’ve seen? There’s this distinction between invention and innovation. You have a company like DuPont or a university like Penn that are coming up with lots of inventions, but then, to actually make them an innovation that actually has success in the marketplace? You just talked to us about that process from a personal perspective. I’m just intrigued or interested to hear a little bit about, what are some of the key organizational problems that you’ve seen that stand in the way of making an invention actually an innovation?
Fadem: That’s a great question. In my opinion, having a common language is the first step. An invention, unless it’s reduced to practice in some way, is not an innovation, in my opinion. Organizations need to agree on what’s an invention and what’s an innovation. Occasionally, they run into trouble doing that, particularly organizations that don’t communicate well. Communication is a fundamental issue. The second issue is management that has participated in new business development or innovative management practices in the past.
“Having a common language is the first step. An invention, unless it’s reduced to practice in some way, is not an innovation.” – Terry Fadem
What I’ve seen in organizations recently is: people build large organizational structures to get specific jobs done and then forget why they built it in the first place. You and I, and everybody else, if we’re going and running an organization, hiring into a DuPont or an IBM or another large organization, hiring to a company that’s already established and has organizations built, the reason they built some of these structures is long since forgotten. But the reason they built them, fundamentally, is responding to something in the marketplace that needed a problem or a technology that had an application and built an organizational structure to deliver that. One of the lessons that needs to be learned in some organizations is to remain open to understanding why the company, why that business, why the structure exists in the first place and be willing to make the change.
There’s communication issues, number one, organizational structure issues, number two, and then I would have to say educational issues on the third hand – not education in training people on technology but in, “Where do I go? How do I collaborate?” Some people don’t know in a university environment, and Penn is a good example. Once upon a time, if someone in the hospital would have an invention or an idea about a new device or a new diagnostic, they didn’t know where to take it. It would literally sit on their mental shelf. If this was a corporation, it would sit on the shelf of the company. It’s an idling asset. It’s not returning anything to the inventor, or to the company, or in this case the hospital, and so they don’t know where to take it.
Education, meaning, “How do I get things done? Where do I take my ideas? Who can turn these ideas into reality? Who can take this invention and turn it into an innovation?” Those are the three components that organizational structures have to think about if they want to grow through innovation. Everybody grows through innovation. I can’t think of a business today, or an institution, even an educational institution, that hasn’t faced that issue of how do we grow, how do we change, how do we respond to the market? How to respond to students, that’s one of the big questions. Where is this market going?
Chaudhuri: You touched upon this in your last response, that there are different roles different kinds of institutions play. Universities often come up with inventions, to use what Nicolaj was talking about, and corporations should, at least in theory, be in charge of commercializing some of these things. There are different forms, but not all the good ideas or technologies come inside. They come from other organizations. How can you partner well with organizations, which are in your ecosystem, but not inside the firm, in order to move this commercialization process along?
Sourcing from the Outside World
Fadem: Some firms do this very well and others less so. The firms that do it well and companies that I’ve interacted with recognize that the world of innovation – the ideas about their business, their technology, what they do for a living – is bigger outside the company than inside the company. There is more outside than in for every business, for every technology, for every company. If you make that leap, then you have a greater willingness to deal with the outside world. Now, who is the outside world? That’s the other question.
“The willingness to partner or cross a line where no one would ever think about going helps foster a huge amount of innovation.” – Terry Fadem
The outside world, number one: academia. I don’t necessarily mean individual faculty members, but institutional places like Penn, Northwestern, all these places. They’re training students, training people in the future of tomorrow. The graduate students in particular, as well as undergraduates, are thinking about those things that solve their problems, those things move forward. A lot of universities now have these project-oriented participatory programs. Penn’s got one, the [Mack Institute’s] CIP program, where companies bring projects to graduate students, and they work on those projects and deliver either a commercial concept idea or a business plan to companies. Northwestern has a similar project going on both for non-medical and for medical industry. Stanford is another place that has these programs. That’s one feature of the marketplace. Academic organizations that have great assets in terms of the great minds of students that can provide an outlet.
Another thing, which should be kind of intuitive but it’s not: where there are people you would never partner with, companies that don’t do business in your space. A story that I used to like to tell: I had a particularly knotty problem with an issue inside DuPont when I was there. I happened to go sit in a meeting at Wharton – it was the Mack Center at the time – and people at the Bank of Montreal were speaking about how they solved a banking problem with customers. I’m thinking, “That’s my exact problem.” In a heavy industry like where we were going with polymers, you wouldn’t think of talking to bankers about how to solve problems. That’s another place people and companies don’t often think about when they’re thinking, “Who are my partners in the marketplace?” They may not be partners in the sense of they’re in your supply chain or may not be partners in the sense of companies or industries you would normally collaborate with, but the ideas and problems they’re solving for their customers are very similar in nature to the problems that need to be solved for a specific entity. Those are two attributes of companies and academic institutions that I’ve seen where the willingness to partner or cross a line where no one would ever think about going helps foster a huge amount of innovation and a series of ideas.
The other problem you get into is more ideas than you can actually act on, which is an attribute of that. There’s a situation that I’ve seen in some companies where I tell them, and I’ve observed they have too much money that they’re throwing at innovation. Innovation and ideas and inventions don’t always need money. As a matter of fact, sometimes the fewer dollars thrown at new ideas or new business development units, the better, because it forces more creative thoughts. It forces people to think about who they might interact with that they haven’t interacted with before. That’s another attribute of that external marketplace to force people out of the comfort zone. Instead of going to management all the time and saying we need to expand our budget or we need to work with another internal group or organization, who on the outside are they forced to deal with because the dollars aren’t there or their collaboration is not there inside the company?
“Innovation, ideas, and inventions don’t always need money. As a matter of fact, sometimes the fewer dollars thrown, the better, because it forces more creative thoughts.” – Terry Fadem
The Key to Alliances
Singh: Terry, you started to talk about partnering, and that leads us to many interesting questions. I was listening to someone in the pharmaceutical industry who was saying that alliances are more difficult than we think because there’s ambiguous authority. Do you want to talk a little bit about that?
Fadem: The first thing is, if someone tells you alliances are more difficult than you think, that’s problem number one. You’re bringing complexity and perspective to a problem that should be fairly easy. Alliances work when the goals and objectives are shared. It’s not a total sharing of goals and objectives. As you know, it’s an overlapping of goals, but some singular objective for the alliance has to be shared.
I don’t think any business ever gets anything done by itself anymore. You’re working in a much larger market now than ever before, and no one party has to bring all solutions to the problem. It starts with: if you think they’re complex, they’re going to be complex because that’s the lens you’re looking through every time. The objective in working with any alliance – and I’ve done a lot of these, particularly when I was in academia full-time – would be to start with, “What are the five or six things you want to accomplish, and what are the five or six things I want to accomplish? Where is the match?”
That simplifies all of the other discussions with respect to that alliance relationship, which is how it starts. If you don’t start with that conversation, the alliance will be complex. In the pharmaceutical industry, and healthcare in general, I’m hoping we’re evolving to that place because as we know in that particular marketplace, no one drug so far is the magic bullet to cure any disease. They seem to be a combination of therapies or therapies that stimulate biology or other relationships that need to be built in order to produce cures and therapeutics that help patients – and help all of us actually – for the future.
Singh: Terry, as you know, a lot of this is music to my ears. I was talking about what other people say about alliances. I actually agree with a lot of what you’re saying. If I may try to put a wrapper on it, I think what you’re saying is that alliance capability really matters, that there are companies that are perhaps not realizing they’re not good at alliances, so they blame alliances as vehicles that don’t achieve goals, and companies that are. The other point you’re making, which we’ll come back to, is that developing a commonality of interest and staying with it is not a trivial issue. That is one of these softer issues that people don’t pay attention to.
“Start with, ‘What are the five or six things you want to accomplish, and what are the five or six things I want to accomplish? Where is the match?'” – Terry Fadem
Fadem: Absolutely vital. A lesson I learned really early in my career was: I was assigned to do M&A work, and I went with this guy named Don White. He was this older gentleman, probably my age now, but with wild white hair. We had an alliance with a French company. Even though it was financially productive, it wasn’t meeting our objectives. We went to France, and as the story goes, they’re telling us, “No, no, no. You can’t redo our relationship. We’re meeting the objectives we put in the contract.” He’s telling them, “That’s not what the business was set up to do and we’re not happy anymore.”
They had a table full of data charts and data, and they’re going through the data. He just took his arm and swept the whole table clear. He said, “Those are just numbers. Let’s just talk about what we want to accomplish.” In doing so, he reset the table, the conversation, and the objectives, as opposed to going through the whole contract issue, which is what lawyers would do. A lawyer’s job is to protect the assets and protect the company and to mitigate risk, but mitigating risk doesn’t always accomplish the objectives.
By doing that, it was this metaphorical, although physical, sweeping of the table clear, which shocked everybody in the room, of course. Very undiplomatic. But that was the lesson I took, that if you don’t start with a clean slate and talk about the specific objectives that you’re trying to reach, you will never get there.
Singh: That’s fabulous. A lot of people think about the legal issues as concrete, so they focus on the contract, but that can actually get in the way of the business issues. You had a very interesting example. Can I ask you to bridge this to the academic and corporate alliances that you did?
Fadem: Sure. In academia, one of the big issues is always health care, as a good example. On the one hand of health care, there is the hospital, medical school, and educational institution. On the other hand, we’ll say there are companies that have new ideas or new drugs or new therapies. Inside the school of medicine, inside a health system, it’s a huge organization of alliances. The internist has an alliance with the surgeon. Even though there’s nothing in writing, they have an understanding of what they’re supposed to be doing for the patient, for the customer. There is an intuitive understanding that is shared completely inside the institution. Inside the medical school, they know they have to educate physicians and make sure that the patients are getting the best care possible.
But inside the hospital and inside the medical practices, there are all these unwritten alliances. There are no documents that govern the relationships among all of these people, yet they know how to work together because their objective is the same: the health of the patient, ensure the patient gets the proper therapy or surgery, or whatever they need. Then you have institutions – drug companies, device companies, diagnostic companies – who then attempt to form this legal relationship with an organization that doesn’t practice legal medicine. They practice customer based, patient-based medicine.
They have alliances among themselves where they’re attempting to solve a problem, and the company comes in. This, by the way, doesn’t have to be medicine. I’ve seen this in a variety of different areas, but I know most about this particular segment of the marketplace. The company wants to deal with everything in a legalistic fashion, which is not how the alliance practice goes on inside of a healthcare institution. The alliances are formed intuitively. They’re not put in writing. Everyone wants the patient to get the exact same benefit. The company does too, but even though they’ll say the health of the patient is most important and we want to solve that, they’re going to come at it from a legal perspective. I’ll give you one case in point.
A major pharmaceutical company, which will go nameless for a reason – you’ll understand in a moment – I go to work with them. Even in their literature, they’re a patient-focused, patient-centric organization. They focus on patients, and they do that. The first thing I did before I went to talk to them was pick up a copy of their annual report. Then, the second thing I did was, I went to their website. In the annual report, there was no reference to patients until I got to page 44, and then, it was in a footnote. Everything else was about the company’s performance, which it should be. It was about their good and bad performance in terms of the business units.
When I went to their website, the very first thing I saw was, “How to report a problem with your pharmaceutical product.” These are not things that are indicative of a patient-oriented, customer-focused organization. It speaks to liability. It speaks to the business issues, but it doesn’t speak to the reason they’re in business. I use that as a way to characterize. They’ve since fixed the problem, by the way. At any rate, they have this understanding of wanting to help patients, but what they’ve done is, they’ve completely turned the business upside down. They say, “We need to take care of all these other issues before we can take care of patients.”
Whereas on the other side of the coin, forming an alliance with the health care institution, they have the exact opposite. We want to solve the problem with the patient. Tell us how you’re going to help us do that. So, those two institutional behaviors don’t speak to each other very easily. People like myself and others have to come in and work hard to make sure you develop this common understanding of why they’re even talking to each other in the first place. That’s what I’ve seen on both sides, and I think that’s the issue.
Learning to Ask Questions
Siggelkow: The fascinating thing about a number of the stories that you’ve been telling us is, it’s about people. It’s about people making decisions or sweeping the table clean. Early on, you started saying how you walk the halls and ask questions and listen. How have you helped other people? How have you mentored other people? I’m just thinking about some of our listeners thinking, “Okay. I want to be like Terry.” What are some tips you can maybe share with our listeners about that?
Fadem: One of the things I did for a long time is, I wrote a book about asking questions. There are two pieces. One is, what questions do I ask if I want to learn more about this, or I want to behave better as a manager, or I want to foster innovation? What do I ask, and how do I ask it?
The second half of that is listening. If you ask a question, listen to the answer. Then, be prepared to know what to do with the answer once you get it. Those are the two halves of wanting to foster innovation or wanting to learn more, because you can’t learn more unless you have an open mind, and you don’t have an open mind unless you know what the questions are. That’s one of the issues I try to address in the book. There’s only eight basic questions: what, where, when, why, who, how, how much. They’re the basic questions that form the core of every problem, every relationship, anything you want to do. The other side of that is listening. That’s the first thing.
“You can’t learn more unless you have an open mind, and you don’t have an open mind unless you know what the questions are.” – Terry Fadem
The second thing I’ve tried to do recently is: I’ve worked with a couple of consulting firms, trying to scale what it is I do, trying to help them understand that A, I ask questions, and B, you’re there to help. I know they’re billable hours, and they think about that. But to try and change people from the lecturing mode, which I learned how to do as an academic, into, more or less, a teaching mode… How do I help people understand what I know and share my experiences in a way that helps them get their job done? Then, be willing, on the other hand, to listen and say, “Oh, I need to learn something new,” because every single person has something to teach.
Those are the things that I see that will help people move from wherever they are to wherever they want to go. If you want to foster new business development and new environments, you have to ask, “How do I get there? Where am I going? Who do I need to talk to?” Most importantly, “What do I need to do to listen better?” People don’t necessarily listen. What I learned in that one scenario with sweeping the table clean was, how do you get people to listen? How do you force yourself to listen? We all have a tendency of wanting to talk. That’s one of the things I’ve taken from that. Then, the other thing is that I wrote the book on questions, and people should think about the questions they need to ask.
It’s About People
Chaudhuri: Absolutely. Clearly, I would expect that you listen very well and observe companies that you work with very well. You do a lot of work with many different organizations spanning different industries. What do you think are the most exciting technologies, inventions, or innovations, which you see on the horizon?
Fadem: Social media has just opened up the world for everyone. I don’t know that we’ve really thought enough about how social media impacts everything we do – literally everything. From the time you get out of bed in morning and even while you’re sleeping, social media has a way of collecting information, and making it available, about your friends and neighbors as soon as you get out of bed in the morning. I don’t know that we’ve actually done the real work we need to do in thinking about how social media can be an aid to just about anything you wish to accomplish.
Even though there’s a ton of social media out there – we all think of Facebook, Twitter, and a broad variety of other things – there’s a host of technologies we’re not making use of. The second wave that I see is changing data to information and then making intelligent use of the information. We’re at the very cusp of things going on in the marketplace. Then, there’s the hardcore technologies, the brain-machine interfaces. There are things we have yet to begin to see happen in the real world. It’s taking the world of data and the world of digital technology, and integrating that either in our clothing, or in a way that makes our lives easier and impacts all the products and services we get.
Those are kind of the big things that I see. As far as medicine goes, what I’m hearing and seeing from the marketplace is: all of the drugs and therapeutics we have, we know how to do them. What is the world of biology teaching us now that we don’t know how to do? We don’t know anything about how cells are really created. There are bacteria that fight bacteria. Are we using them in our bodies, and in drugs and therapeutics to fight off disease? The new wave of technology in medicine is going to be really focused on biology, which is where things started a couple hundred years ago before drugs were invented.
You have this big cycle, right? Once upon a time, we had no drugs. Nothing. We tended to put mud on it or treat it with water from this stream instead of that stream because it was better for you. We’ve come full circle to that in understanding how the environment impacts us. By the same token, to get back to the people comment that Nicolaj made, we’re rediscovering it’s people. It’s social media. It’s all about people. It’s people interacting in a way that helps us identify and solve problems in a unique fashion that we haven’t faced before. Those are the big cycles I see that have all the new stuff embodied, but the new stuff is just the old stuff coming around again, enabled by better technology.
“We’re rediscovering it’s people. It’s social media. It’s all about people interacting in a way that helps us identify and solve problems in a unique fashion that we haven’t faced before.” – Terry Fadem
Looking at the Finances
Singh: To summarize some of what has been said, there’s the question of partnering, but also the role of people in actually implementing strategy. That really comes down to human capital. Then, we have, more recently, social media and communication and those kinds of things. One of the tensions that we haven’t talked about is the tension between making money today and looking for money tomorrow – the whole issue of, how does a Chief Financial Officer look at all of this? Because you’re talking about people and social media and partnering. We’ll start this discussion, and then we’ll come back to it. But go ahead, please.
Fadem: If you can’t pay your bills today, there is no such thing as tomorrow. That’s one of the significant issues. Instead of thinking of innovation as new and different, or taking the company or institution into a different marketplace, one of the things I’ve looked at is companies where they’re spending their dollars, because that’s what the financial people will think about. What are their dollars being invested in? That tells them where the company is going.
It works out like this from what I’ve seen, 80/20. Eighty percent of the dollars invested in new technology, ideas, research, or innovation are focused on maintaining, growing, and improving the business. In that 80%, however, is a huge amount of innovation that either could be done or is being done under the surface. To make the accounting people and the financial people and investors happy, that needs to be brought out. Companies do this every day and don’t think about it because it isn’t necessarily sexy or fancy, or doesn’t get out there and get attention. But companies are spending 80% of their reinvesting dollars in continuing the business to improve the business as it is.
The other 20% is focused in two ways. One, those new things way out in the future take a flyer on something that may or may not produce anything in the future. Then, another chunk that goes into the adjacent marketplaces, the places that accountants can really understand and the financial people can focus on. I’m going to take technology and things I understand what to do with, and apply them to something different.
Singh: It’s like a portfolio concept you’re talking about?
Fadem: Yes, more of a portfolio concept.
Singh: I mean, there’s this three horizon model, where horizon one is your core business. You’re saying 80% is there. Then, horizon two and three are the future models, of them three being the most uncertain, but also hopefully the highest return.
Fadem: Yes, very clearly.
Singh: That balance is really, really interesting.
Fadem: On the current business and the model, it’s a question of definition. It’s a question of, “Well, the business is operating, but what is it doing that’s innovative and new?” That’s where I think none of us do as much work as we should because every single day, people go to work and think about how to solve the problems of the day. A lot of innovation happens. A lot of practical problem-solving occurs, and we don’t account for it in a way that gives us this understanding of, “Our business is really moving forward.” Then, we make these mistakes. We look at these markets of the future and take these flying leaps on investing in something not only uncertain but unfamiliar. It’s the unfamiliar space that is the most dangerous to get management into because the likelihood of generating return in unfamiliar spaces is very, very difficult to do.
It’s re-characterizing what it is a company does and not just shuffling the numbers around and giving it new names, but really thinking about it. You have 100 projects going on, and they’re talking about improving a manufacturing line or improving a publication line or improving the way in which digital information is put out. What are the innovative things that those people are doing to make the job easier, better, faster, and deliver the information, product, or services that people want? Is there a commercial opportunity within that? That’s an area that I think current business operations don’t always pay a great deal of attention to.
Uncertainty and Risk
Chaudhuri: You touched upon uncertainties obviously at the heart of managing innovation. Yet, we don’t have a crystal ball. How do we make good decisions if we don’t have a crystal ball?
Fadem: I once read an article – and this goes back to my schooldays – about what risk is. The objective is to understand risk. You’re always uncertain, I would say, about everything. A meteor hits the earth tomorrow, and none of us thought about it. Uncertainty is kind of the fact of life, but it’s risk understanding that I think we need to separate out from uncertainty. The objective, and particularly in new business development or new venture development or any innovation to a commercial opportunity, would be to understand the risks, as opposed to avoid taking them because even if you avoid taking a risk, that is a risk in and of itself.
“Even if you avoid taking a risk, that is a risk in and of itself.” – Terry Fadem
Understanding the risks would be something that I promote every day I can because no one embarks on any venture, whether it’s an airplane ride, a boat ride, or a car drive across the street, without entertaining a risk of some kind or another. Yet, we don’t think about it. You and I get in our cars, and we drive. We know that 80% of most accidents occur within six or seven miles of one’s house, not going across the country to L.A. or San Diego. We think about long-distance travel as risky, but it’s that short travel that’s higher risk, in that we do it so often that we are inured to the risk. It’s the risks we don’t recognize that create certainty, when in fact they’re just as uncertain as taking a risk on some new innovative venture.
The answer that I would have would be: understand the risk, and then decide if that’s a risk I can tolerate. Everybody gets a prospectus in the mail for all different kinds of ventures, or electronically. The past performance is not necessarily an indicator of future performance. We all know and understand that intuitively, and yet we still make decisions based on the fact that we’re willing to assume certain risks. Putting certainty and uncertainty aside, I’ve just pierced that balloon. There’s no such thing as certainty, and I believe that. There is only such a thing as risk, and it’s a risk of doing or a risk of not doing. It’s just understanding what it is we’re willing to tolerate in terms of risk.
Singh: That’s a very excellent point, actually. Just to add to it briefly, the idea of risk versus uncertainty. Risk is something where you know a probability distribution – like a financial stock, you might know what its average and variability was. Uncertainty is where you do not know the distribution, so you’re much more exposed. I think that’s what you’re talking about. Then, you were talking about a portfolio of options where people have some where the risk is relatively measurable, some where the risk is not measurable.
Terry, as always, these are big topics, and we can go on for many more hours. Thanks so much for joining us on the show tonight. Your book, “The Art of Asking: Ask Better Questions, Get Better Answers” has received a lot of publicity, and I know it’s one that certainly many of our listeners would love to read.
Fadem: Thank you, Harbir.
Singh: As we look at what Terry was raising in the area of innovation, it came with an external focus. Several things struck me, and I have some questions which can help all of us make sense of it. He talked about the cost of inaction at the end. This is a fascinating question because you can easily be ahead where you say, “Everything is risky. I need to return cash to my shareholders today.”
Fifty percent of the S&P 500 has had some degree of investor activity in the last 5 years. What that means is there’s a lot of pressure to deliver earnings today, but then analysts and investors want companies to continue to innovate. To some extent, this tension is what Terry is talking about – that sourcing technology may be one way to alleviate the pressure of internal development, but also complement internal development. Then, he also talked about this idea of portfolios. Nicolaj, any further thoughts?
Siggelkow: I was also struck by that last comment as you said, about the risk of not doing things. Quite often in organizations, innovations or new initiatives are always seen as risky relative to just continuing with the status quo, continuing with the existing strategy. But, of course, in the changing environment, not changing might be also really risky. One useful framework that I’ve been using is to imagine your existing strategy is a new strategy. Someone came up to you and said, “Hey, that’s your strategy.” Subject it to the same sort of analysis you would subject the new strategy to. You will also realize, “Wow, there are quite a lot of uncertainties around our existing strategy, things that have to go in a certain way to make this strategy really successful.” Sometimes, finding that right balance or comparing new ideas with the existing way on equal terms is quite important to overcome that status quo bias, which I think we see in a number of companies.
Singh: This idea of putting your existing strategy through the same test is a very, very interesting one. I’m reminded of one of the insights in the strategy process, which is that the quality of discourse really matters. At times, the discourse is such that status quo is exempt, but anything new has to go through a lot. If you look at Blockbuster versus Netflix, Netflix was almost counted out, but it came back with streaming video. Then, they actually turned the corner. Sometimes, the margin between success and failure is not much, but Netflix actually did pursue a new strategy, and the cost of inaction for Blockbuster was bankruptcy.
Siggelkow: One of the keys that he was referring to, though not so explicitly, is, we have to have a portfolio approach. We don’t really know what’s coming around the corner, but we have to be able to react well. That means that we run many different experiments simultaneously, both internally and externally. That will help us to spot what’s coming up, follow it, and then take the appropriate action at the time that’s needed strategically or organizationally.
“We have to have a portfolio approach. We don’t really know what’s coming around the corner, but we have to be able to react well.” – Nicolaj Siggelkow
Singh: What we really see in today’s discussion is that maybe the corporate world and the academic research world are not that different in creating new technologies. That’s one of the things that Terry talked about. Maybe the nature of risky projects is really what we are confronting. I was struck by that. I was struck by the idea of people being important. I was struck by the idea of information gathering. In a world where we’re talking about creating new ventures, at the end of the day, it comes down to identifying the new business model that maybe has a chance to deal with this new uncertainty.
About Our Guest
Terry Fadem is a Senior Fellow at the Wharton School’s Mack Institute for Innovation Management and an Adjunct Lecturer at the Kellogg School of Management at Northwestern University. Before that, he was Emergent Director of the Office for Corporate Research at the University of Pennsylvvania’s Perelman School of Medicine, and a director of new business development at DuPont.
His interest is in speeding up the process of moving ideas to market, which he has accomplished as a leader, both in the academic and business communities. He has founded new businesses, mentored startups, and also maintained a strategic consulting practice.
The Mack Institute debuted its first episode of Mastering Innovation on Thursday, December 7. Mastering Innovation is live on Thursdays at 4:00 p.m. ET. Listen to more episodes here.