Australian Enterprises - Are you a Transformation Skeptic or Digital Explorer?

What we can learn from Telsa’s innovation culture:

Last week, Tesla has surpassed General Motors to become the most valuable US automaker, with a market capitalisation of $US50.9 billion. That’s despite the fact that Tesla is expected to lose more than US$950 million this year (while GM expects to earn more than US$9 billion) and delivered less than 80,000 vehicles last year (compared to GM’s more than 10 million).

Tesla’s incredible momentum shows that the market cares more about future potential and innovation than current profits and cash flow. As one analyst put it:

“Tesla engenders optimism, freedom, defiance, and a host of other emotions that…other companies cannot replicate…As they scramble to catch up, we think Tesla’s competitors only make themselves appear more desperate.”

Disruption is not only happening in the automotive industry - a growing number companies, and indeed entire industries, are being rapidly and fundamentally transformed by digital technology at an unprecedented pace. Digitisation could deliver around $100 trillion in value to business and society over the next decade.

Many businesses are moving beyond viewing technology merely as a cost and seeing it as an important enabler of revenue generation. In order to unlock those vast benefits and fully realise technology’s potential, it is vital for businesses to understand digital transformation’s opportunities and tackle the perceived challenges head on. The good news is that change and innovation capabilities are within the reach of all enterprises across all sectors, not just Tesla and other tech giants.

The Tesla way

Tesla is a well-known disruptor of the automotive manufacturing industry. It’s been recently ranked as third (after Apple and Google) in the US’ 50 most innovative companies. But its real innovation isn’t the electric car but in its business practices which are significantly different from incumbent car manufacturers.

Tesla uses continuous improvement methods to innovate faster than its competitors. It has dispensed with the traditional concept of model years in favour of more frequent updates and enables owners of older cars to download new firmware to gain access to new features. It also championed transparency and open sourced its patents. It circumvents dealers and sells directly to consumers. In short, the automotive industry’s incumbents are up against a challenge of great magnitude.

Tesla’s process is uniquely focused on speed. It stamps its own body panels in-house, but also makes its own battery packs and motors in its assembly plant. It even makes its own plastic steering wheel casings because suppliers took months to turn around designs. Tesla updates designs continuously, cross-fertilises and borrows ideas freely from SpaceX, including its extensive use of aluminum in both the body and the chassis of the Model S.

Tesla is simply a great example of using software to search for new opportunities and execute validated opportunities faster than your competitors, to achieve a competitive advantage. Ultimately, Tesla skillfully leverages the power and flexibility of software to accelerate its innovation cycle. As such, its long-term value is not captured by the value of its cars or IP, but by its ability to continuously create value for its customers and attract new customers, through innovation.

The transformation dilemma

There are two fundamental issues that usually come up when enterprises are faced with a digital transformation challenge:

Transformation skeptics

First, there are the “Transformation Skeptics” - many enterprise employees or executives believe that their enterprises are fundamentally different to tech giants such as Google, Amazon or Netflix - they often think that the methodologies, systems and cultures developed and deployed by Silicon Valley just won’t work for them.

Some companies believe that real speed (i.e. intra-day deployments) is not warranted, claiming that their industry simply doesn’t require this sort of agility. Such inward, unambitious thinking restrains innovation, holds back progress and directly plays into the hands of new entrants enabling them to seize the huge opportunities left unexplored by laggard incumbents. When Henry Ford made cheap, reliable cars, people said, ‘Nah, what’s wrong with a horse?’. Ford made a huge bet, and it worked.

Nowadays, start-ups can take advantage of widely available, cheap resources - that were once only open to established players - to rapidly develop and test products and thus disrupt existing markets. Start-ups can tap into vast, flexible infrastructure, open-source tools/languages, API’s, and marketing platforms.

Incumbents may indeed operate in vastly different industries to digital natives or have complex, traditional business models. But they often treat challenges such as size, regulation, legacy technology or other unique characteristics of their sector or company as immovable barriers to change. While today’s enterprise transformation problems may be convoluted - they are all fairly common and solvable. However, the most serious barriers to organisational change tend to stem from culture, leadership and strategy.

2. Explorers vs. Exploiters

Second, enterprises often stumble or fail when confronted with disruptive technology change because of the innovator’s dilemma - a well known concept articulated in one of the most important books ever written on innovation. The conundrum is often how to pursue innovation without risking present customers’ needs and existing profits and growth.

In order to protect their dominant position, firms tend to underestimate or dismiss the competition, or they react in a half-hearted way in order to guard their more mature and lucrative markets. Companies such as Blockbuster, Xerox, Blackberry, Kodak and Borders are well-known examples of how failure to adapt fast can lead to extinction - the same practices that may have led the business to be successful in the first place, can eventually result in its demise.

There is a stark difference between the mindset and systems required to explore new ideas and develop innovative products and those needed to effectively exploit an existing, proven market - the structures, skills and processes that might work for the former could lead to failure in the latter.

An ‘explorers’ team might adopt a radical strategy, rethink a business model, operate in small cross-functional teams, have high risk and failure tolerance. On the other hand, an ‘exploiters’ team might focus on incremental improvement, existing customer satisfaction and achieving planned milestones and targets that centre on an already captured market. The million dollar question is how to transform a risk averse culture that focuses on the present rather than the future.

So how do you foster an innovation culture?

Nowadays, digital technology introduces cross-industry competition and global disruption. In Australia, cosy duopolies in the insurance industry have faced growing competition from supermarket players such as Coles for the past few years and Amazon’s imminent launch will likely upset established retail and supermarket giants that have long operated in dormant, uncompetitive environment. The future of banking will likely be shaped by disruptive fin-techs which may be based in London, Austin or Melbourne.

Companies can therefore no longer afford to ignore fast moving disruptive forces that are upending their (and other) industries or focus solely on exploiting current markets and servicing or building products for existing customers. They must adopt an explorer’s mindset and be prepared to compete with global, cross-industry disruptors.

Many companies try to address cultural or leadership shortfalls by taking ‘innovation shortcuts’ such as acquiring start-ups, setting up in-house innovation labs, deploying the latest shiny tools or reorganising certain departments. However, these measures may not always work or be necessary. In fact, they can only succeed if such initiatives form part of a congruent, broader scale effort to foster an innovation culture across the entire organisation - led by the executive team - that is aligned with a clear, long-term strategy.

Interestingly, Tesla’s job ads reveal something about its unconventional, innovative modus operandi:

“Tesla’s mission is to accelerate the world’s transition to sustainable energy by bringing high-performance electric vehicles and sustainable energy products to market. This mission requires fast paced innovation and execution. At Tesla, we celebrate experimentation and unconventional thinking to find solutions to problems previously thought unsolvable…

Our world-class teams operate with a non-conventional product development philosophy of high inter-disciplinary collaboration, flat organizational structure, and technical contribution at all levels. You will be expected to challenge and to be challenged, to create, and to innovate. These jobs are not for everyone; you must have a genuine passion for producing the best vehicles in the world.

Without passion, you will find what we’re trying to do too difficult.”

Innovative capabilities and cultures, and indeed the ability to thrive in the digital age, are achievable by all enterprises regardless of their location, sector, size, history or other specific quirks. Crucially, however, transformation success depends on bold leadership, a forward-looking culture and fast, strategic decision-making.

Pursuing speed through microservices

In the software development domain, the concept of microservices applies the speed philosophy and allows software to be written, shipped, and modified again rapidly in order to facilitate commercial goals and stay competitive. As long-time ‘aggressive agile’ advocate and microservices luminary Fred George asserts, the key metric by which development success should be measured is the ‘time from notebook to production’.

Fred’s Tesla-like ‘go faster’ ethos of ‘developer anarchy’ encourages technical contribution across the board at all levels, so that everyone is a “developer” or “value creator” - simply managing people or applications is no longer enough.

The idea is that existing agile development processes may be fine if you are working in one or two weeks’ cycles but that won’t hit the mark in exceedingly competitive environments that demand faster software delivery speeds, e.g. the need to go from concept to production within an hour. This, in turn, requires ruthless agility and the questioning of established processes as well as the willingness to experiment and iterate with novel approaches.

Microservices mean that each software element is reduced to a single function, confined to small blocks of code (approximately 20 lines of code per service). Each microservice can be easily written and rewritten in the most appropriate programming language to suit the problem.

Fred George’s approach to testing overhauls bloated testing models, favouring radically enhanced production monitoring to slim down and minimise testing requirements. Immediate feedback is available in real time by monitoring the production components. As Fred points out, traditional testing models should only exist to provide developers with fast feedback on their work.

Risk is offset and heavily reduced by deploying new versions of working software side by side with older versions. Clever load balancing of workloads restricts exposure to bugs/unknowns in newly deployed microservices until they are proven stable and reliable.

Microservices ‘done right’ enable companies to forge an edge in competitive markets that address complex problems through facilitating rapid execution and fast feedback loops on ideas and experiments. This means embracing containers via technologies like Docker or Kubernetes to enable small modules of code to be run on self-contained resources (containers) decoupled from the wider operating system.

This decoupling from physical resources allows for easy deployment to cloud (ie AWS as the industry leading benchmark) by the development teams themselves and opens the door to new approaches to appliance-like infrastructure models. This encapsulates the “DevOps” to “NoOps” philosophy.

This is an innovative, forward thinking approach to development that has been successfully utilised by the likes of Netflix. As Fred George points out, organisations should be optimising for their most important resource - developers’ time. Such a frictionless, fast-paced environment fosters ideas, ownership and innovation. These practices obviously require world class teams, which usually thrive on world class challenges.

Are you failing fast enough?

Some well known companies adapted to change by decisively shifting to new digital models thus capturing the tremendous opportunities brought about by digitisation. Through leveraging technologies and rebooting for the digital age, Lego, Axel Springer, Autodesk, General Electric and HBO (to name a few) have overcome significant threats to their old business models.

In Australia, leading players across the private and public sectors - including Aussie, The Commonwealth Bank, Domino’s Pizza, Cricket Australia, the Pact Group and the NSW Department of Education have embraced digital transformation and reaped significant benefits along the way. These companies viewed transformation as a competitive necessity and a significant opportunity.

Both global and Australian case studies highlight that while digital transformation may be a complex task, the time to start is right now. Enterprises have significant resources at their disposal - strong brands, global distribution networks, established customer relationships, comprehensive data and decades of institutional know-how. These can all be leveraged for their digital transformation.

As GE Digital’s CEO noted of their successful transformation initiative:

“By the time it’s obvious, it’s too late. What that means is, now is the time to act. That you’ve got to realize we’re in the first two minutes of a soccer match; by halftime it’s too late.”

It remains to be seen if more leading Australian brands will heed the wake up call and boldly embrace fast innovation in its true sense before it’s too late. Australian enterprises can lead the way as digital explorers - this will largely depend on their determination to overcome crippling skepticism and their commitment to fighting obstructive inertia, stagnation and complacency. To quote Elon Musk: