“The biggest change you are going to see over the next year is that we want to bring our toy stores to life,” newly minted Toys R Us CEO Dave Brandon told a reporter a little over a year ago. “I want kids to be dragging their parents to our stores because they want to see what’s going on at Toys R Us this weekend.”
The sentiment seems eerily similar to former Blockbuster CEO Jim Keyes’ “Rock the Block” strategy and his assertion that “As long as we change the product assortment to meet the changing needs of the customer, our stores will remain relevant.” Much like Blockbuster, Toys R Us recently filed for bankruptcy.
When a business gets into trouble, the first impulse is often to improve operations. That can be a good idea, because improving the fundamentals of a business will make it perform better. Yet it also fails to take into account that there is a essential trade-off between optimization and innovation. To beat disruption, you need to explore and experiment to find something new.
Anatomy Of A Shift
The use of the term paradigm shift has become so common that we scarcely stop to think where it came from. When Thomas Kuhn first introduced the concept in his classic The Structure of Scientific Revolutions, he described not just an event, but a process, which he noticed had pervaded the history of science.
It starts with an established model, the kind we learn in school or during initial training for a career. Models become established because they are effective and the more proficient we become at applying a good model the better we perform. We rise through the ranks and become successful.
Yet no model is perfect and eventually anomalies show up. Initially, these are regarded as “special cases” and are worked around. However, as the number of special cases proliferate, the model becomes increasingly untenable and a crisis ensues. Eventually, a new model is found, becomes established and the process repeats itself.
Improving operations and driving efficiency can improve the performance of an established model, but do nothing to mitigate the effects of a paradigm shift. When a model is broken, it’s broken. You need to shift to something else.
The economic version of a paradigm shift is creative destruction. Although the concept is mostly associated with Joseph Schumpeter, it actually originated with Karl Marx. In Marx’s view, capitalism was fraught with internal contradictions that would inevitably result in a labor surplus, which would depress profits and lead to exploitation.
Yet where Marx saw exclusively destruction, Schumpeter found the potential for intense entrepreneurial creativity. For him, the cycle of destruction and creation was mostly positive, helping to drive economic growth and to allay the exploitive effects that Marx described. Markets may be inherently unstable, but they are also productive and raise living standards.
More recently, Harvard professor Clayton Christensen described a similar process called disruptive innovation. In his study of successful companies that fail, he found that the problem wasn’t that they had become inefficient, but that they were over-delivering on outdated metrics, which changed the basis of competition and created an opening for new disruptive rivals.
Anyway you slice it, business models never last. Eventually, you need to figure out something new. How do you do that? The answer is never clear.
The Struggle To Adapt
The process of being disrupted is never pleasant. People work their entire careers to become masters of their craft. Their brains become wired to see patterns and interpret them in a specific way. They are also usually surrounded by a network of people who have been indoctrinated in much the same way, reinforcing the existing model.
There is also the element of risk to take into account. A model becomes established because it works and honing that model further is likely to produce better results. Switching to something else means embarking headlong into an abyss. The urge to trust our instincts as well of those around us, combined with the risk of forging a new path is why we fail to adapt.
So you can see why, as Kuhn put it, “the emergence of new theories is generally preceded by a period of pronounced professional insecurity.” Things never flow smoothly from the old to the new and you can’t jump to a new paradigm through mere force of will. You need to find a new path first and that’s always difficult to see clearly.
Disruption is a breakdown of conventional wisdom, so what replaces a failing business model can never be evaluated by conventional metrics. You need to experiment and iterate until an answer presents itself. That’s part of what Lou Gerstner meant when he embarked on his historic turnaround of IBM and said, “The last thing IBM needs right now is a vision.”
The Next Big Thing Always Starts Out Looking Like Nothing At All
We celebrate great corporate turnarounds because they are so rare. Usually, once a business loses its edge, it either descends into obscurity or fails outright. The few who do make it across the valley of death often emerge looking very different than they did before. Apple became a device company. Marvel became a hit on the screen. Microsoft became a cloud company.
In the case of IBM, Gerstner’s focus on execution saved the company from bankruptcy, but it was two unforeseeable developments that made it thrive again. The first was a breakthrough in parallel computing at the company’s research division. The second was the services business, which got a boost from the Internet boom that happened just a few years after Gerstner arrived. Neither was obvious at beforehand.
The truth is that innovation needs exploration because you can never plan your way through discovery. Today, there is no shortage of people who think they know how to fix a company like Toys R Us and they are most probably all wrong, because what will return a company like Toys R Us to market leadership is something we’ve never seen before.
The next big thing always starts out looking like nothing at all. If it was easy to see coming, everybody would be doing it already and the market impact would be minimal. So you can never create something truly new based on what you already know. The only way to find it is to start looking.
Not all who wander are lost. The trick is to wander with purpose.