MANAGEMENT

FALL 2016: THE DISRUPTIVE ISSUE

Autonomous drones will soon be

checking electric power lines,
delivering packages and dropping
life-saving supplies into war zones.
It’s all part of ‘the fourth industrial
revolution’. World Economic Forum
chairman Klaus Schwab explains
on page 18.

Features

6 18 26
Machine Learning and the The Fourth Industrial Revolution The Disruption Dilemma
Market for Intelligence by Klaus Schwab by Joshua Gans
by Ajay Agrawal Technological innovations are fuelling Firms that are disrupted are not
A market for machine intelligence momentous change throughout necessarily poorly managed; instead,
is on the horizon, and the time the world, generating great benefits they choose to continue on the path
to prepare for it is now. and challenges, in equal measure. that brought them to success.
 32
So You Think You Can Innovate?
by Andrew Atkins and Michael Seitchik
Innovative leaders don’t have
to come up with all the ideas.
They just have to set the stage
for others to push
boundaries, every day.
50
Creativity, Clusters and
Why Your Barista Has Mixed
Feelings About You
by Roger Martin, Richard Florida
and Melissa Pogue
Nearly half of the workforce is stuck in
low and declining-wage employment,
virtually guaranteeing the continued
stagnation of the middle class.
70
Disrupting Financial Services:
An Interview with Peter Aceto
by Francesco Bova
The CEO of Tangerine tells Rotman
Professor Francesco Bova how
he harnessed diversity of thought
to give the big banks a run
for their money.
38
Goodbye Linear Thinking:
Hello Exponential!
by Peter Diamandis and Steven Kotler
Our brains were not designed
to process at the scale or speed
of today’s ‘exponential’ world.
Here’s what to do about it.
56
The Networked Organization:
How to Turn Relationships into
Competitive Advantage
by Charlie Brown
We hear a lot about disruptive
companies these days; but
we rarely hear about the shifts
in relationship structures that
make the disruption possible.
76
Blurring the Lines: Preparing
for Convergence in Health
and Life Sciences
by Kais Lakhdar, Georgina Black
and Will Mitchell
Massive opportunities exist to lead
the transformation of the global
healthcare market and create value for
stakeholders throughout the system.
44
Leadership Forum:
Machine Learning 101
compiled by Karen Christensen
Experts from Bloomberg, MasterCard,
Uber, AME Capital and Stanford
share their thoughts on how advances
in machine learning are shaping
new markets for intelligence.
62
Redesigning Work in an Era
of Cognitive Technologies
by David Schatsky and Jeff Schwartz
Cognitive technologies will change
the employment landscape in the
coming years, leading to the redesign
of jobs and the introduction of new
types of work.
84
The World’s Most Innovative
Companies: 4 Things
that Differentiate Them
by Michael Ringel, Andrew Taylor
and Hadi Zablit
The world’s best innovators draw
on speed, lean processes and
technology to explore adjacent growth
opportunities. Here’s how to do it.

In Every Issue
5 Ajay Agrawal, Steve Arenburg,
From the Editor
12
Thought Leader Interview:
Vijay Govindarajan
by Karen Christensen
92 96
Idea Exchange
“There are literally tons of opportunities out there to look
at the way the world is now, and ask, What could be?”
92
QUESTIONS FOR Jeff Dyer
96
FACULTY FOCUS Sarah Kaplan
100
QUESTION FOR Daniel Debow
(Rotman JD/MBA ‘00)
103
FACULTY FOCUS Nina Mažar
107
FACULTY FOCUS Kristina McElheran
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FROM THE EDITOR Karen Christensen
The Disruptive
Issue
DISRUPTIVE INNOVATION KNOWS NO BOUNDARIES: eBay and Craig-
slist killed classified ads; Starbucks’ drowned out traditional
coffee shops; Uber upset the taxi industry worldwide; Skype
provided free long-distance calls — with video — outdoing gi-
ants like Bell and AT&T. In each instance, innovative — and
some would say disruptive — entrepreneurs have produced pow-
erful competitive advantages and tremendous wealth. Could
you or your company be next?
Let’s find out: try answering the following statements with a
simple Yes or No:
I often ask questions that challenge fundamental
assumptions. ____
I creatively solve challenging problems by drawing on
diverse ideas or knowledge. ____
I get innovative ideas by directly observing how people
interact with products and services. ____
I regularly interact with diverse people to find and refine
new business ideas. ____
I frequently experiment to create new ways of doing
things. ____
According to research by Harvard’s Clayton Christensen and
colleagues, if you answered Yes to at least three of these ques-
tions, the odds are that you possess what he calls ‘disruptive in-
novator potential’. If you don’t do any of these things on a regular
basis, you are unlikely to be an innovator — unless something
changes. The good news is, you can change your behaviour to
increase your disruptive potential. In this issue of Rotman Man-
agement, we will examine some of the habits and mindsets of
successful innovators and entrepreneurs.
It is not easy to picture the buying and selling of cognitive
capabilities traditionally embedded in humans, but the fact
is, a market for machine intelligence is on the horizon — and
leaders ignore it at their own peril. Rotman Professor and Cre-
ative Destruction Lab Director Ajay Agrawal explains why in
Machine Learning and the Market for Intelligence, on page 6.
World Economic Forum founder Klaus Schwab believes
we are in the midst of a ‘fourth industrial revolution’, character-
ized by smart and connected machines and systems and break-
throughs in areas ranging from gene sequencing to nanotech-
nology. He describes what lies ahead in The Fourth Industrial
Revolution, on page 18.
Humans evolved in a world that was local and linear, but
today we live in a world that is global and experimental. The prob-
lem is, our brains weren’t designed to think this way. Peter Dia-
mandis and Steven Kotler present a coping framework known
as ‘the six Ds of exponentials’ in Goodbye Linear Thinking,
Hello Exponentials, on page 38.
Elsewhere in this issue, Tuck School of Business Professor
and innovation expert Vijay Govindarajan is featured in our
Thought Leader Interview on page 12; and we feature an excerpt
from Rotman Professor Joshua Gans’ new book, The Disruption
Dilemma on page 26. In our Idea Exchange section, The Innova-
tor’s DNA co-author Jeff Dyer describes the five discovery skills
of innovative entrepreneurs on page 92; and Rotman professors
Sarah Kaplan, Nina Mažar and Kristina McElheran discuss
their latest research.
As management guru Tom Davenport has said, rather
than asking, ‘What tasks currently performed by humans will
soon be done by machines?’, we should be asking, ‘What new
feats might people achieve if they had better-thinking ma-
chines to assist them?’ By embracing this mindset, perhaps we
can follow Davenport’s advice and re-frame ‘the threat of auto-
mation’ as ‘opportunities for augmentation’.
Karen Christensen, Editor-in-Chief
editor@rotman.utoronto.ca
Twitter: @RotmanMgmtMag
rotmanmagazine.ca / 5
 Machine Learning
and the Market
for Intelligence
A functioning market for machine intelligence is on the horizon,
and those who fail to prepare for it do so at their own peril.
by Ajay Agrawal

FOR MOST PEOPLE, it is not easy to picture the buying and selling
of cognitive capabilities that have traditionally been embedded
in humans — things like judgment and decision-making. Yet,
thanks to recent advances in machine learning, we face the very
real possibility of precisely such a ‘market for intelligence’. Given
the potential of this market to transform the global economy, we
must all begin preparing — now — for its emergence.
In 2014, upon reflecting on the significance of achieving
artificial intelligence (AI), renowned physicist Stephen Hawk-
ing wrote: “The potential benefits are huge; everything that civi-
lization has to offer is a product of human intelligence; we cannot
predict what we might achieve when this intelligence is magni-
fied by the tools that AI may provide; but the eradication of war,
disease, and poverty would be high on anyone’s list. Success in
creating AI would be the biggest event in human history.”
Of course, some of the companies that were not prepared
for the arrival of the last technology to transform our economy
— the Internet — are still licking their wounds; and many others
are long gone. While the outcomes were less severe for coun-
tries than for businesses, this technology shock also shifted the
relative wealth of nations. For example, the United States was a
primary beneficiary among wealthy countries, and India among
poor countries.
To be clear, machine intelligence is still in its infancy, and
while some of the current applications are remarkable, none are
transformational as of yet. For example, the recommendation
engines employed by companies such as Amazon and Netflix
— which learn our preferences and recommend which books we
should buy or which movies we should watch — are a common
application of machine learning. Although they may increase

rotmanmagazine.ca / 7
the sales of books and movies — and may even enhance social
welfare to some extent, by increasing matches between con-
sumers and products — they do not represent a transformation
of the economy.
Similarly, in the healthcare sector, applications of machine
intelligence that identify and classify tumours from medical
imaging data — with a higher degree of accuracy than the best
human technicians — will surely enhance the productivity of
doctors; but they will not transform the broader economy.
Perhaps the reason the driverless car has become so iconic
is that this particular application of machine intelligence offers
the general population a glimpse into something truly trans-
formational. When the average person rides in an autonomous
vehicle for the first time, she rarely steps out of it and com-
The Business Opportunity of the Century by Pedro Domingos
In the Information Age, we have more choices than ever before
— which makes choosing harder than ever. If you go to your
local Barnes & Noble store, you can choose from maybe
50,000 books; but Amazon offers millions. Thankfully, it also
has a ‘model of you’, based on everything you’ve ever done on
the site. Effectively, this model does your browsing for you, and
presents you with your own bookshelf, different from everyone
else’s. Netflix has a similar model for movies. These customer
models generate 33 per cent of Amazon’s revenue and 75 per
cent of Netflix’s.
Such models aren’t just for books and movies: increasingly,
they are being created for everything we consume, online or off-
line. Even Walmart uses machine learning to decide which goods
to stock and where to put them in the store. Machine learning is the
new ‘middleman’ in just about every transaction — from products
to jobs, medical treatments, even relationships. These days, a third
of all marriages start out on the Internet, and the matchmakers are
machine-learning algorithms.
There is one big problem with all of this: each company’s
‘model of you’ is based on its own interactions with you. As a result,
these models are extremely narrow and incomplete. There is a
better way, and it involves pooling all of the data you generate,
and from it, creating one complete, 360-degree Model of You.
Think of all the variables that characterize you, and how
they depend upon each other. In principle, machine learning can
figure out those dependencies. As a result, it will soon be able
to predict what you need right now, or whether two people are a
good romantic match — not just based on their profiles, but on
their entire lives. It will also be able to predict whether you would
enjoy a particular job at a particular company, based on everything
it knows about you, the job, and the company. And from your vital
signs — continuously captured by your smartphone’s sensors —
it will be able to predict whether you’re about to have a heart
attack, and call 911.
8 / Rotman Management Fall 2016
ments on the potential productivity increase for the automobile
or transportation industry. Instead, she is likely to exit with a
sense of having experienced transformational technology that
transcends the automobile.
I suspect the reason the driverless car has this effect on peo-
ple is because they imagined a much greater gap between the
machine’s ‘recommendation system’ and the cognitive require-
ments of a human driver. We are used to cars analyzing data from
cameras and other sensors and giving us recommendations on
how to drive safely: we are not surprised when our vehicle warns
us to stop backing up, not to change lanes, or to apply the brake
because we are approaching the car in front of us too quickly at
a traffic light. But with the driverless car, we are shocked to learn
that, in fact, this new machine does not need human input at all.
If today’s models of you — based on only a sliver of your
data — are already so valuable, imagine how valuable such a
360-degree Model of You would be?
One day soon, everything that gets bought and sold will
be based on these models. Personal models are the ultimate
platform, and the world economy will run on them. I don’t think
it’s an exaggeration to say that this may be the greatest business
opportunity in history — and that whoever provides people with
their personal models will be running the world economy. Not
surprisingly, several powerful companies are already pursuing
this full tilt: Google has Google Now; Apple has Siri; Microsoft
has Cortana; Facebook has M; Amazon has Echo. And there
are others.
Wouldn’t it be crazy to try to compete with these giants?
Actually, no. The problem is that each of these companies has
an existing business model, and at the end of the day, none of
them is compatible with the idea of personal models. The reason
is simple. These companies have a conflict of interest. They want
to serve you, but they also want to make money in their own
specific ways: Apple by selling you gadgets, Google by show-
ing you ads, and so on. What we really need is a different kind of
company — one that is to your data a bit like your bank is to your
money. Your bank stores your money and keeps it safe, but it does
more than that: it invests it on your behalf. Similarly, your data bank
will store your data, learn and continually update the Model of
You and use it to accomplish things for you.
Once you have a personal model, you will be able to tell
it that you’re looking for a job, and have it instantly interview
for all the open positions that match your specifications, by
interacting at high speed with the models of the employers’
HR departments. While one copy of your model is doing this,
another can be browsing for a new car, exhaustively researching
all the options and haggling with car dealer bots, so you don’t
have to.
In the case of some vehicles on the market today, they only de-
liver their judgement in the form of a recommendation to offer
the human driver a sense of control or perharps even relevance
(and for the time being, because it is a legal requirement.)
Lessons From the Internet
How will advances in machine intelligence transition from pro-
viding simple productivity enhancements in individual, narrow
markets, to transforming the overall economy? Will such a transi-
tion happen gradually or suddenly?
To the extent that the last technology shock — the Internet
— offers guidance on this question, the answer is both. In the
case of the Internet, the development of the technology and as-
sociated infrastructure occurred gradually, but the transforma-
In order to pull this off, we need three things.
1. A way to get all of your data together in one place.
This can be achieved by routing all of your interactions through
a ‘proxy server’. Once you install the proxy on your devices,
everything passes through to a middleman in the cloud, which
records everything. And then the learning can begin.
2. Better learning algorithms than we have today. To create
a unified Model of You, we need a unified learning algorithm,
capable of learning from all the different kinds of data about you
and integrating it into a coherent whole. We’re actually mak-
ing good progress on this. We won’t have the ultimate learning
algorithm in the next few years —but we’ll have one that’s good
enough for many of these purposes.
3. A way to get the wheels turning. If you have no data to start
with, you have nothing to offer. This is where the incumbents
— the Googles and Apples — have their biggest advantage,
because they already have ongoing interaction with their users
that generates heaps of data.
In my view, whoever wins this race has a good chance of
becoming the world’s first trillion-dollar company. And, as with every
wave of technological innovation, there will be tremendous opportu-
nities in riding the coattails of the change.
Take apps, for example. The future of apps is the exact
opposite of the present. Today, every app is a stand-alone product
that tries to hog your attention and keep you away from other apps.
But no one has the patience to learn a lot of different apps, and it’s
a huge pain when you need to use more than one to accomplish
something — so the writing is on the wall. In the world of personal
models, the model sits between all the apps and the user, and
the model will select which app to use for what — so the most
tive impact on the global economy occurred relatively suddenly.
Specifically, the economic transformation began abrupt-
ly in 1995. Of course, the Internet was not invented in 1995.
Following is a brief chronology of its emergence:
1960s The U.S. government begins work on a fault-tolerant
computer network for communications.
1980s The Advanced Research Projects Agency Network (AR-
PANET) serves as a backbone for the interconnection of
regional academic and military networks.
1991 PSINet and UUNET, two of the first internet service
providers, begin their initial year as private firms.
successful apps will be those that work well with many others.
For leaders, it’s not just that the products and services you
offer have to become more customizable: your decisions as to
what products and services to offer in the first place, and what
their features will be — down to the smallest details — will be
driven by customer models. But you won’t own these models, and
even if you’re a Fortune 500 company, with few exceptions, you
won’t have enough data about your customers to build a model
that is competitive with the ‘Big Data bank’. As a result, you’ll have
to make alliances and become part of an ecosystem of data and
models—either centered on one of the data banks or with enough
scale to become one of them. If you flub this, you risk becoming
just a satellite, with the data banks capturing most of the value; or
you could go out of business altogether.
As a society, we are going to have to decide what kind of
‘society of models’ we want to have. What will be allowed, and
what will not? How will we ensure that everyone benefits? How
will we make the transition as smooth as possible?
There is something we need to do as individuals and as a
society, and there is something we need to do as entrepreneurs,
innovators and investors: as individuals, we need to take control
of our models; and as innovators, we need to make that possible.
If we do this right, a bright future lies ahead where our lives
will be happier and more productive. If we don’t, it will be a huge
missed opportunity.
Pedro Domingos is a Professor of Computer Science and
Engineering at the University of Washington and the author
of The Master Algorithm: How the Quest for the Ultimate
Learning Machine Will Remake Our World (Basic Books,
2015). He spoke on this topic at the December 2015 Rotman
School Conference, Machine Learning and The Market for Intelligence.
For more from this conference, see page 44.
rotmanmagazine.ca / 9
 Given the potential of this market to transform the global economy,
we must begin preparing for its emergence.
1991 The High Performance Computing Act is passed.
1992 Network Solutions takes control of the domain name
system and the Internet Society is founded.
1993 The Mosaic Browser is launched for Unix and Windows
OS.
1994 The cookie is invented at Netscape and the World Wide
Web Consortium is founded.
Then, in 1995, Bill Gates wrote his famous ‘Internet tidal wave’
email, Microsoft launched Windows 95, and the National
Science Foundation Network — which had been promoting
advanced research and education networking since 1985 —
was decommissioned, removing the last restrictions on the use
of the Internet to carry commercial traffic. Soon after, Netscape
went public with a market capitalization of $3 billion — without
a nickel of profit. At that point, everything started to change at
such a fundamental level and rapid pace that experts and pun-
dits alike began referring to a so-called ‘New Economy’. Over
the next decade, the companies listed on the Fortune 100
changed more than during any other 10-year period over the
previous half-century.
So, when will machine intelligence experience its own
‘1995’? As with any early-stage, general-purpose technology,
there is much speculation and debate. For example, last fall Elon
Musk remarked: “AI is much more advanced than people real-
ize.” To which Yann LeCun responded via Twitter: “No, it’s not.
Quite the opposite in fact.” Neither is uninformed. Musk, CEO
of Tesla, had recently shipped an over-the-air software upgrade
that enabled the Models S and X to drive on public roads, change
lanes, navigate traffic and merge on and off highways, autono-
mously. At the same time, LeCun, a deep-learning pioneer, is
a distinguished professor of Computer Science at NYU and the
Director of AI Research at one of the most advanced AI compa-
nies in the world, Facebook.
Within this fog of uncertainty, futuristic depictions abound.
Not only are fiction writers featuring AIs in stories like Transcen-
dence, Her and Ex Machina, but governments — notably Japan,
Germany, China and the U.S. — are featuring machine intel-
ligence in their industrial strategies. Doing so raises questions
about the potential mass dislocation of human labour. Will in-
telligent machines supersede humans in a broad range of cogni-
10 / Rotman Management Fall 2016
tive tasks, the way they did with manual tasks? Surely, this is not
imminent; and yet, five years ago, neither was the driverless car.
In the midst of all the speculation, real companies and in-
vestors are making real capital-allocation decisions — today.
For example, in 2014 Google acquired the pre-revenue AI start-
up Deep Mind for approximately $500 million and created
AlphaGo — which this year famously beat the world’s top hu-
man player at the ancient Chinese game, Go, and in the process,
demonstrated what appeared to be machine ‘intuition’ rather
than just the implementation of brute-force logic. In March
2016, General Motors acquired AI startup Cruise for over $1
billion to help turn regular vehicles into self-driving cars, and the
following month, Salesforce acquired AI startup MetaMind to
automate and personalize marketing and customer support.
Companies such as these are betting on how the future will
unfold, and we should all be paying close attention, because their
bets are endogenous: they will influence the rate and direction of
technological development — as well as where and how it occurs.
In closing
For those contemplating a ‘wait-and-see’ strategy with respect
to AI, the downfall of once-mighty corporations like Barnes &
Noble and Blockbuster provide ample warning. It is incum-
bent upon investors, governments and firms in every sector of
the economy to have a thesis regarding how their industry will
be transformed when the necessary technological and regulatory
pieces snap into place, and the world is suddenly confronted with
a functioning market for intelligence.
Given the falling cost of processing power, storage and sen-
sors — coupled with the rising collection of data from mobile
devices, wearables, and other Internet-of-Things devices — we
are on the brink of substantial economic turbulence. While
there is plenty of disagreement as to when AI will come to frui-
tion, one thing is clear: decisions of significant consequence
lie ahead.
Ajay Agrawal is the Peter Munk Professor of Entrepreneur-
ship, Professor of Strategic Management and Academic
Director of the Creative Destruction Lab at the Rotman
School of Management.
Rotman faculty research is ranked #3 globally by the Financial Times.
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 The Dartmouth professor and McKinsey Award
winner discusses his Three Box Solution—and the power
of ‘reverse innovation’.
Thought Leader Interview:
Vijay Govindarajan
by Karen Christensen
Describe the universal challenge faced by today’s leaders.
Modern executives face two fundamental challenges: optimizing
their existing business while at the same time, innovating to cre-
ate new value for the future. The problem is, these challenges call
for a completely different set of metrics, mindsets and leadership
approaches. Managers and executives, consultants and academ-
ics have long wrestled with how to achieve this, and in response,
some of them have embraced a concept known as ‘ambidexter-
ity’ — the organizational capability to fulfill both the innovation
and execution imperatives at once.
However, the challenge goes beyond managing today’s busi-
ness while creating tomorrow’s. I have found that a critical third
element is required, and that is proactively letting go of yesterday’s
values and beliefs. The fact is, to get to the future, you must build
it, day by day — and that means setting aside certain beliefs, as-
sumptions and practices that will otherwise become obstacles
between your business of today and its future potential.
You developed a new model to tackle this universal challenge.
Please describe it.
I call it the Three Box Solution. In Box 1, you take the required
steps to manage your present core business to its peak efficiency.
In Box 2, you take steps to escape the traps of the past by identi-
fying and divesting businesses, practices and attitudes that have
lost relevance. And in Box 3, you generate breakthrough ideas
12 / Rotman Management Fall 2016
and convert them into new business models. Leaders at all levels
— but especially CEOs — must pay close attention to each box.
What are some of the best approaches for each box?
The strategy in Box 1 is to make linear innovations within your
existing business model. The challenge is to focus on your cus-
tomer’s near-term needs, optimize operations for high efficiency
and align rewards and incentives with your strategy. Leaderly be-
haviour in Box 1 includes setting challenging goals for peak per-
formance; analyzing data to quickly spot and address exceptions
and inefficiencies; and creating a culture of doing everything
smarter, faster and cheaper.
Box 2 involves building a support structure for non-linear
ideas by letting go of past practices, habits and attitudes. The
past will always ‘fight back’ — so you have to be prepared to make
tough calls about your core values here. The leadership skills
ILLUSTRATION BY CHERYL CHALMERS
required in Box 2 include gathering and analyzing weak signals
from the environment; championing the ideas of maverick think-
ers; and publicly penalizing ‘foot-draggers’.
Box 3 strategy involves experimentation that resolves un-
certainties and new learning that strengthens an idea or reveals
its weaknesses. The challenge here is that it is not always clear
which idea to pursue first: you will need a method to gauge rela-
tive value and priority. And keep in mind that the success rate for
Box 3 experiments is quite low.
 If you proactively attend to the future every day, you earn something
priceless: an opportunity to shape it to your advantage.
Non-Linear Innovation at Hasbro
In the mid-1990s, toy giant Hasbro saw itself as a prod-
uct company, with offerings consisting mainly of toys (G.I.
Joe, Transformers, My Little Pony) and board games (Life,
Monopoly, Candy Land). Hasbro competed in an industry
broadly referred to as ‘family entertainment’—toys and games
described by marketers as appealing to ‘kids from two to 92’.
Until the 1990s, people typically purchased its products in a
retail store.
Today, Hasbro is a self-styled ‘branded-play company’.
Its relationships with customers may or may not begin with
a physical product on a shelf. Customers get to know and
use its core brands across multiple platforms: online games,
fan sites, movies and TV shows, digital gaming systems, and
comic books and magazines produced through partnerships
with Disney and others.
The goal is to create many opportunities for ongoing
exposure to and experience of the various Hasbro brands. For
example, the company has parlayed its popular Transformers
line into a wide array of media, products and experiences.
Having studied this company for years, I have been
struck by the fact that these changes were not sudden,
but were the result of continuing attention, experimentation
and learning—some of it ambiguous or inconclusive—
that spanned most of two decades. For Hasbro, ‘inventing
the future’ has been more of a steady process than a
cataclysmic event.
You have said that failing to make investments in Box 3 will
result in a disappointing future. Why is that?
Here’s an analogy. Consider Box 3 activity for an individual: exer-
cising regularly to ensure one’s future health. As with the failure
to make ongoing investments in our personal fitness, businesses
that do not attend to their own futures, day in and day out, are
likely to be eventually surprised by a crisis — one that may have
been brewing for years. On the other hand, if you proactively at-
tend to the future every day, you earn something that is priceless:
an opportunity to shape it to your advantage.
Which box do leaders struggle with the most?
For some time, I have been troubled to see how often compa-
nies fail to invest wisely in their future. To be sure, Box 1 is vitally
important: it is your performance engine; it funds day-to-day
operations and generates profits for the future. Where problems
arise is when the present crowds out other priorities — for exam-
ple, when the only skills brought into a business are those that
serve today’s core. What usually happens is, as Box 1 grows in
14 / Rotman Management Fall 2016
dominance, Box 3 languishes, and Box 2 barely exists. The fact
is, a business will only achieve optimal strategic fitness when its
leaders thoroughly understand and carefully manage the ben-
efits and risks of all three boxes.
Can you describe what actually takes place in Box 2?
The work of Box 2 often comes down to making key distinctions
between values that are timeless to your organization vs. values
that are timely — but ultimately perishable, with the passing of
time. The key is to test your current lines of business for their
alignment with timeless values vs. timely opportunities. As indi-
cated, you will not succeed in Box 3 (creation) before you first
excel in Box 2 (destruction.)
Describe the ‘success trap’ that many organizations fall into.
The fact is, the greater your success in Box 1, the more difficul-
ty you are likely to face in boxes two and three. It’s all-too-easy
to get wrapped up in Box 1, because it’s such a tranquil refuge:
the rewards of focusing on the present are immediate and easy to
measure. The skills and expertise required to thrive in Box 1 are
already known and abundantly available — whereas looking 10 to
15 years out is ambiguous and uncertain. Every bet you place on
the future is an exercise in guesswork — and the results won’t be
known for a long time.
Furthermore, the risks of the present are relatively low.
Those that exist—market volatility, macroeconomic forces, com-
petitors’ moves and regulatory changes—are generally well un-
derstood and manageable through established means. The fact
is, even for a Silicon Valley start-up, if you don’t continuously in-
novate, Box 3 will soon become Box 1.
Talk a bit about the difference between linear and non-linear
innovation.
Linear innovations improve the performance of your current
business. As such, they are part of the work of Box 1. For example,
Hasbro developed Star Wars-themed versions of two of its clas-
sics: the game of Monopoly and Mr. Potato Head (‘Darth Tater’).
Both were brand extensions within an essentially-unchanged
business model. This type of innovation builds on the present
core, making use of Box 1 knowledge, systems and structures.
Linear innovation is straightforward and unthreatening to the
status quo.
Meanwhile, non-linear innovations — the domain of Box 3
— create entirely new business models by dramatically redefin-
ing your suite of customers, reinventing the value you offer them
and/or redesigning the end-to-end value chain architecture
through which you deliver that value. Most businesses spend far

too little time thinking about the problems of people who are not
already their customers.
A huge non-linear shift is taking place as we speak: in India,
60 per cent of the population is aged 35 or younger, and the ma-
jority of young people have access to mobile phones. As a result,
e-commerce is about to explode in India: it has the potential to
grow by a factor of 10 in the next five years.
Of course, this market will grow very differently than it has
in the U.S., because India doesn’t have the physical infrastructure
for moving goods, or the widespread use of credit cards, and so
on. Therefore, areas like finance and infrastructure require busi-
ness model innovations — and those innovations can be exported
to places like Africa and South America. Before long, we will see
the Ali Baba’s of India emerge — and there will be lots of them.
How do ‘weak signals’ fit into the picture?
Weak signals in the environment consist of emerging changes
to technology, culture, markets, the economy, consumer tastes,
behaviour and demographics. As the term suggests, these sig-
nals are difficult to absorb because they are incomplete and
unclear. However, they are critical, because they constitute
the ‘raw material’ for developing hypotheses about non-linear
changes in the environment. Hasbro devised a method for tap-
ping into weak signals and using them to make inferences about
possible futures that might develop. Their process begins with
three questions:
1. What particular factors and conditions does our current suc-
cess depend on?
2. Which of these factors might change over time — or are
changing already, putting our success at risk?
3. How can we begin to anticipate and prepare for these pos-
sible changes, so as to take advantage of their impact?
Having answered these questions, Hasbro was able to make
what in retrospect were smart, ‘non-linear moves’ towards an un-
predictable future.
What’s the best way to identify a weak signal?
Weak signals arise from market discontinuities, so first, I would
advise people to look at the realm of ‘customer discontinuities’:
are your fastest-growing or most profitable customer segments
likely to be the same ones in 10 to 15 years? Who will be your
customers in the future? Are there small or emerging customer
segments today that are using or even customizing your prod-
ucts or services in unconventional ways? Which non-consumers
today could become customers in the future? What would be
their priorities?
Box 2 Example: Hasbro’s ‘Forgetting
Challenges’ in the Mid 1990s
Following are some of the core assumptions that Hasbro
needed to selectively forget to ensure its future:
• We are a product company.
• We make analog-based games that have long
product life cycles and generate high margins.
• We distribute through brick-and-mortar retail outlets.
• Our consumers are kids aged 15 and younger.
• We make board games that promote face-to-face
social interaction in a physical setting.
• We are an American company.
Next, I would advise looking at the realm of ‘technological
discontinuities’. What disruptive technologies might open up
new opportunity spaces? Then, look at non-traditional competi-
tors: are today’s most potent competitors likely to be the same in
10 to 15 years? Who will you be competing against in the future?
Other areas to spend some time thinking about are new distribu-
tion channels and regulatory changes.
What kind of leadership is needed to make the Three Box So-
lution work?
In addition to being able to spot weak signals, embracing the
three boxes requires someone who is able to operate comfort-
ably in two time horizons: ‘microscope’ (in order to closely exam-
ine current initiatives) and ‘telescope’ (to look out one-to-three
years, as well as five-to-ten years.) It also requires a demonstrated
ability to experiment, learn and adapt; and a willingness to leave
behind previously-embraced mindsets and behaviours.
What are the basic tenets of what you call ‘reverse innova-
tion’?
Historically, big companies innovated in rich countries like the
U.S. and sold those products in poor countries like India. Reverse
innovation is about doing the exact opposite. This may appear
counterintuitive. It’s easy to see why a poor man would want a
rich man’s product: the rich man has a car, so the poor man wants
a car; the rich woman has a cellphone, so the poor woman wants
one. But until now, the reverse has not been true. Why would a
rich man want a poor man’s products? Yet I predict that this is
going to be the most significant growth opportunity for Western
firms going forward.
Reverse innovation has two components: first, you can’t sim-
ply export to developing countries; you have to innovate there.
Step two is to bring those innovations to rich countries.
rotmanmagazine.ca / 15
 Most businesses spend far too little time thinking about the problems
of people who are not already their customers.
There are about 5.5 billion people in developing countries,
and the total size of these economies is around $30 trillion. Even
if you apply a modest growth rate of five per cent, that equals $1.5
trillion of incremental growth. So, developing countries have a
massive consumption base; but that still doesn’t explain why you
have to innovate there. To understand that, look at some other
statistics: in a rich country, you have one consumer with $1,000
to spend. In a poor country, you have 1,000 people with $1 to
spend. The total consumption is the same, but the fundamental
difference is the demand structure.
In 2008-2009, you took a leave from Dartmouth to serve as
Professor in Residence and Chief Innovation Consultant at
General Electric. Describe your experience there.
The fact is, I ended up being less of ‘the expert’, and more of a
student at GE. The key lesson I learned was that in order to suc-
ceed, multinational companies have to challenge two assump-
tions that they hold near and dear to their hearts:
1) The assumption that the economies of poor countries de-
velop in the same way as rich countries; and
2) The assumption that products created to address poor
countries’ special needs cannot be sold in the rich world,
because they’re not ‘good enough’.
In my time working with Jeffrey Immelt and his team, we found
that these assumptions were simply not true. The reality is that
poor countries do not follow the same path and can actually jump
ahead of rich countries — because of their willingness to adopt
breakthrough innovations long before the rich world is ready for
them. With per capita incomes that are a fraction of those in the
rich world, they are more than happy to adopt high-tech solutions
that deliver decent performance at an ultra-low cost — i.e. ‘a 50
per cent solution at a five per cent price’.
We quickly saw that products created to serve these low-
cost markets could also be used to create brand new markets in
the developed world. In other words, we could address unmet
needs by creating dramatically lower price points or pioneering
new applications.
Can you provide an example?
Of course. In its healthcare business, GE makes products like
MRI machines, ultrasounds and electro-cardiograms (ECGs). In
the U.S., its ECG machine costs around $25,000, and it comes
with a very sophisticated custom printer, which costs another
$25,000. So this is a $50,000 product. GE used to sell this ma-
chine in India, where only a small percentage of city hospitals
16 / Rotman Management Fall 2016
could afford to buy it. What about the 90 per cent of Indians
living in rural areas? There are no hospitals in most of these
towns, which means that the hospital must come to the patient.
You basically have to take the ECG machine and go door to door.
But the machine weighs 200 pounds. Even if you managed to get
it on a bus, most rural citizens don’t have electricity; and even
if you managed to find electricity in the village, the machines are
so sophisticated that they come with a 500-page user manual.
The fact is, despite not having access to hospitals or doctors,
this 90 per cent of the population still has heart attacks, so we
needed to find a solution. So, GE created a $500 ECG machine.
Think about it: $50,000 vs. $500. In my view, if you want to serve
rural India, you need this kind of ‘one per cent solution’, and if
you want to unlock urban India, you need a ‘10 per cent solution’.
If a product costs $100 in the U.S., it better cost $10 in urban
India, and $1 in rural India.
Price isn’t the only factor: this ECG machine weighs less
than a can of Coca-Cola. It operates on batteries, which is criti-
cal in rural India, and it’s very easy to operate, with only two but-
tons. Such innovations are creating a whole new market. The best
part is this: the low-priced ECG machine is now being sold in 150
countries, including the U.S., transforming healthcare.
How will this machine add value in the U.S.? Imagine there
is an accident on a highway. An ambulance is on its way. You
can’t fit the $50,000 machine in it, but you can certainly have
the smaller, lighter machine ready to go. Or, imagine a crowded
place in a hospital, such as the operating room. You can’t just
wheel in the $50,000 machine, but you can definitely use the
small one. Such examples are plentiful.
Companies seeking to enter emerging markets need to stop
asking, ‘What is the market for my transplanted global strategy?’
and start asking, ‘What is the smartest strategy for this market,
using our global competencies and resources?’ Innovating for
these markets requires a different paradigm for innovation: from
‘value for money’ to ‘value for many’.
Vijay Govindarajan is the Coxe Distinguished Professor at Dartmouth’s
Tuck School of Business and a Marvin Bower Fellow at Harvard Business
School. He is the author of several books, most recently, The Three Box
Solution: A Strategy for Innovation (Harvard Business Review Press, 2016).
He won the 2015 McKinsey Award for ‘Best Article Published in Harvard
Business Review’, for “Engineering Reverse Innovations” (co-authored
with MIT Professor Amos Winter) and is a co-leader of the global initiative
to design a $300 house.
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 Welcome to
The Fourth
Industrial
Revolution
Technological innovations are fuelling momentous change throughout
the world, generating great benefits and challenges, in equal measure.
by Klaus Schwab

THROUGHOUT HISTORY, revolutions have occurred when new tech-
nologies and novel ways of perceiving the world trigger a pro-
found change in economic systems and social structures. The
first profound shift — the transition from foraging to farming —
happened 10,000 years ago, and was made possible by the do-
mestication of animals. The agrarian revolution combined the
efforts of animals with those of humans for the purpose of pro-
duction, transportation and communication. Little by little, food
production improved, spurring population growth and enabling
larger human settlements and the rise of cities.
The agrarian revolution was followed by a series of indus-
trial revolutions that began in the second half of the 18th century,
with the first spanning from about 1760 to 1840. Triggered by the
construction of railroads and the invention of the steam engine,
it ushered in mechanical production. The second, which started
in the late 19th century and into the early 20th century, made
mass production possible, fostered by the advent of electricity
and the assembly line. The third industrial revolution began in
the 1960s. It is usually called the computer or digital revolution
because it was catalyzed by the development of semiconductors,
mainframe computing (1960s), personal computing (1970s and
80s) and the Internet (1990s).
Today, we are in the midst of a fourth industrial revolution
that began at the turn of this century and builds on the digital
revolution. In this article I will describe the challenges and op-
portunities it presents for modern business leaders.
A Different Kind of Revolution
The fourth industrial revolution is not just about smart and con-
nected machines and systems: its scope is much wider. Occurring
simultaneously are waves of further breakthroughs in areas rang-
ing from gene sequencing to nanotechnology, from renewables
to quantum computing. It is the fusion of these technologies —
and their interaction across the physical, digital and biological
domains — that make this revolution fundamentally different
from its predecessors.
Emerging technologies and broad-based innovation are dif-
fusing much faster and more widely than in previous revolutions
— which continue to unfold in some parts of the world. The sec-
ond industrial revolution, for instance, has yet to be fully experi-
enced by 17 per cent of the world, as nearly 1.3 billion people still
lack access to electricity. This is also true for the third industrial

rotmanmagazine.ca / 19
 The question for every company is no longer,
‘Am I going to be disrupted?’ but, ‘When is disruption
coming, and what form will it take?’
revolution, with more than half of the world’s population — four
billion people, most of whom live in the developing world — lack-
ing internet access.
While I am convinced that the fourth industrial revolution
will be every bit as powerful and historically important as the
previous three, I have two primary concerns about factors that
may limit its potential. First, the levels of leadership and under-
standing of the changes underway — across sectors — are low,
when contrasted with the need to rethink our economic, social
and political systems to respond to the current revolution. As a
result, both at the national and global levels, the requisite insti-
tutional framework to govern the diffusion of innovation and
mitigate the disruption is inadequate at best — and at worst, al-
together absent.
Second, the world lacks a consistent, positive and common
narrative that outlines the opportunities and challenges of the
fourth industrial revolution — a narrative that is essential if we
are to empower a diverse set of individuals and communities and
avoid a backlash against the fundamental changes underway.
The speed of innovation in terms of both its development and
diffusion is faster than ever. But it is not just about speed; returns
to scale are equally staggering. Digitization means automation,
which in turn means that companies do not incur diminishing
returns to scale (or less of them, at least).
To give a sense of what this means at the aggregate level,
compare Detroit in 1990 — then a major centre of traditional in-
dustries — with Silicon Valley in 2014: in 1990, the three biggest
companies in Detroit had a combined market capitalization of
$36 billion, revenues of $250 billion, and 1.2 million employees.
In 2014, the three biggest companies in Silicon Valley had a con-
siderably higher market capitalization ($1.09 trillion), generated
roughly the same revenues ($247 billion), but with about 10 times
fewer employees (137,000).
The fact that a unit of wealth is created today with so many
fewer workers compared to 15 years ago is possible because digi-
tal businesses have marginal costs that tend towards zero. Addi-
tionally, the reality of the digital age is that many new businesses
provide ‘information goods’ with storage, transportation and
replication costs that are virtually nil. Some disruptive technolo-
gy companies seem to require little capital to prosper. Businesses
such as Instagram or WhatsApp, for example, did not require
much funding to start up, changing the role of capital and scaling
20 / Rotman Management Fall 2016
business in the fourth industrial revolution.
Aside from speed and breadth, this revolution is unique be-
cause of the growing harmonization and integration of so many
different disciplines and discoveries. Today, for example, digital
fabrication technologies can interact with the biological world.
Some designers and architects are already mixing computational
design, additive manufacturing, materials engineering and syn-
thetic biology to pioneer systems that involve the interaction
among micro-organisms, our bodies, the products we consume,
and even the buildings we inhabit. In doing so, they are making
(and even ‘growing’) objects that are continuously mutable and
adaptable — hallmarks of the plant and animal kingdoms.
Meanwhile, artificial intelligence (AI) is all around us, from
self-driving cars and drones to virtual assistants and translation
software. AI has made impressive progress, driven by exponen-
tial increases in computing power and by the availability of vast
amounts of data — from software used to discover new drugs to
algorithms that predict our cultural interests. Many of these algo-
rithms learn from the ‘bread crumb’ trails of data that we leave in
the digital world. This results in new types of ‘machine learning’
and automated discovery that enables ‘intelligent’ robots and
computers to self-program and find optimal solutions from first
principles.
Applications such as Apple’s Siri provide a glimpse of the
power of one subset of the rapidly-advancing AI field — so-called
intelligent assistants. Voice recognition and artificial intelligence
are progressing so quickly that talking to computers will soon be-
come the norm, creating what some technologists call ‘ambient
computing’, in which robotic personal assistants are constantly
available to take notes and respond to our queries.
Inequality: A Systemic Challenge
It is my belief that the fourth industrial revolution will generate
great benefits and challenges, in equal measure. Of particular
concern is exacerbated inequality. The challenges posed by ris-
ing inequality are hard to quantify, as a great majority of us are
consumers and producers, so innovation and disruption will both
positively and negatively affect our living standards and welfare.
To date, the consumer seems to be gaining the most, as the cur-
rent revolution has made possible new products and services that
increase (at virtually no cost) the efficiency of our personal lives.
Ordering a cab, finding a flight, or watching a film — all of these
 To prevent the concentration of power in just
a few hands, we have to find ways to balance the
benefits and risks of digital platforms.
tasks can now be done remotely.
The challenges created by this revolution appear to be
mostly on the supply side — in the world of work and produc-
tion. Over the past few years, an overwhelming majority of the
most developed countries and some fast-growing economies
such as China have experienced a significant decline in the share
of labour as a percentage of GDP. Half of this drop is due to the
fall in the relative price of investment goods, itself driven by the
progress of innovation (which compels companies to substitute
labour for capital.)
As a result, the great beneficiaries of this revolution are the
providers of intellectual or physical capital — the innovators, the
investors and the shareholders — which explains the rising gap
in wealth between those who depend on their labour and those
who own capital. It also accounts for the disillusionment among
so many workers — convinced that their real income may not in-
crease over their lifetime and that their children may not have a
better life than theirs.
The concentration of benefits and value in just a small per-
centage of people is also exacerbated by the so-called ‘platform
effect’, in which digitally-driven organizations create networks
that match buyers and sellers of a wide variety of products and
services and thereby enjoy increasing returns to scale. The con-
sequence of the platform effect is a concentration of few-but-
powerful platforms that dominate their markets. The benefits
are obvious, particularly to consumers: higher value, more con-
venience and lower costs. Yet so, too, are the societal risks. To
prevent the concentration of value and power in just a few hands,
we have to find ways to balance the benefits and risks of digital
platforms (including industry platforms) by ensuring openness
and opportunities for collaborative innovation.
The question for all industries and companies is no longer
‘Am I going to be disrupted?’ but, ‘When is disruption coming,
and what form will it take?’ It is our responsibility to ensure that
we establish a set of common values to drive policy choices and
to enact the changes that will make the fourth industrial revolu-
tion an opportunity for all.
Three Categories of Megatrends
My selection of the key technologies to watch is based on research
done by the World Economic Forum and the work of several
of its Global Agenda Councils. We have identified three sets of
megatrends that convey the broad landscape of technological
drivers to date, and they are deeply interrelated.
1 PHYSICAL MEGATRENDS
To date, there are four key physical manifestations of the techno-
logical megatrends.
Autonomous vehicles. The driverless car dominates the news,
but there are many other autonomous vehicles out there — in-
cluding trucks, drones, aircrafts and boats. As technologies such
as sensors and AI progress, the capabilities of these autonomous
machines will improve at a rapid pace. It is only a question of a
few years before low-cost, commercially-available drones, to-
gether with submersibles, are used in widespread applications,
including checking electric power lines or delivering medical
supplies in war zones. And in agriculture, the use of drones —
combined with data analytics — will enable more precise and ef-
ficient use of fertilizer and water.
3D printing. Also called ‘additive manufacturing’, 3D printing
consists of creating a physical object by printing layer-upon-layer
from a digital 3D drawing or model. This is the opposite of ‘sub-
tractive manufacturing’ — which is how things have been made
until now, with layers being removed from a piece of material un-
til the desired shape is obtained.
This technology is being used in a broad range of applica-
tions, from large (wind turbines) to small (medical implants).
For the moment, it is primarily limited to applications in the
automotive, aerospace and medical industries. Researchers
are already working on 4D — a process that would create a new
generation of self-altering products capable of responding to
environmental changes such as heat and humidity. This technol-
ogy could be used in clothing or footwear, as well as in health-
related products such as implants designed to adapt to the hu-
man body.
Advanced robotics. Until recently, the use of robots was con-
fined to tightly-controlled tasks in specific industries such as
automotive. Today, robots are increasingly used for a wide range
of tasks, from precision agriculture to nursing. Rapid progress
in robotics will soon make collaboration between humans and
rotmanmagazine.ca / 21
machines an everyday reality. Moreover, because of other tech-
nological advances, robots are becoming more adaptive and
flexible, with their structural and functional design inspired by
complex biological structures (an extension of a process called
biomimicry, whereby nature’s patterns and strategies are imi-
tated.)
New materials. There are now applications for ‘smart materials’
that are self-healing or self-cleaning, metals with memory that
revert to their original shapes, and ceramics and crystals that
turn pressure into energy. Take advanced nanomaterials such as
graphene, which is about 200-times stronger than steel, a mil-
lion-times thinner than a human hair, and an efficient conduc-
tor of heat and electricity. When graphene becomes price com-
petitive — currently it is one of the most expensive materials on
earth, with a micrometer-sized flake costing more than $1,000
— it could significantly disrupt the manufacturing and infrastruc-
ture industries.
The Disruptive Power of Platforms by Sangeet Paul Choudary, Geoffrey Parker and Marshall Van Alstyne
We used to live in a world where businesses operated ‘pipelines’,
creating products and services that flowed through a linear value
chain from supplier to consumer. But increasingly, market upstarts
are leveraging connectivity, democratized tools of production
and recent developments in artificial intelligence to challenge this
linear flow of value — building ‘platform ecosystems’ that enable
value exchange across a network of participants.
These platforms do not need to create value themselves: in-
stead, they aid in the creation of value by producers and consum-
ers in their network. Platforms create incentives for participation,
provide a plug-and-play infrastructure for people to connect, and
rules that foster interactions. Facebook doesn’t create its content,
Google its web pages, Apple its apps, or Alibaba its store fronts.
These successful platform companies have led the way, followed
by entrants like Uber, Airbnb, Flipkart, Slack and Spotify. Each
has grown rapidly by aggregated ecosystems of value in a very
small period of time. We have observed that two narratives charac-
terize this disruption:
1. Efficient Pipelines Beat Inefficient Ones
Newspapers were the first to feel the heat as ‘efficient pipes’
beat inefficient ones. The Internet of the 1990s created a vast
global infrastructure for the distribution of content and access to
markets at near-zero marginal costs of distribution. Newspapers
were rapidly disrupted because of the Internet’s ability to deliver
news globally for free. The further unbundling of classifieds and
advertising from news into multiple pipelines further challenged
the traditional news business model. While the entire industry
suffered, two types of companies played by new rules: on the
one hand, Google created a massive empire by aggregating
unbundled advertising and growing that market further; on the
other hand, traditional media houses like Schibsted Media
22 / Rotman Management Fall 2016
2 DIGITAL MEGATRENDS
One of the main bridges between the physical and digital applica-
tions enabled by the fourth industrial revolution is the Internet of
Things (IoT). In its simplest form, the IoT can be described as a
relationship between things (products, services, places, etc.) and
people that is made possible by connected technologies and vari-
ous platforms.
Sensors and numerous other means of connecting things
in the physical world to virtual networks are proliferating at an
astounding pace. Smaller, cheaper and smarter sensors are be-
ing installed in homes, clothes and accessories, cities, transport
and energy networks, as well as manufacturing processes. This
will radically alter the way in which we manage supply chains
by enabling us to monitor and optimize assets and activities at
a very granular level. In the process, it will have transformative
impact across industries, from manufacturing to infrastructure
to healthcare.
Group shifted their focus from advertising to online classifieds
to instead own the monetizable portions of the news business.
In a similar manner, Amazon’s rise as an e-commerce store
triggered the fall of retailers like Borders while also putting many
traditional mom-and-pop stores out of business because they
could not compete with Amazon’s superior distribution economics.
Netflix, likewise, beat Blockbuster by leveraging a data-rich pipe-
line to first disrupt rentals and then subsequently change the game
to streaming. In short, Amazon and Netflix built efficient online
pipeline businesses with better scale economics, successfully
disrupting their offline counterparts.
2. Platforms Beat Pipelines
Over the last decade, we have seen a second wave of disruption
sweep across industries: platforms are now beating pipelines.
The most successful businesses on the Internet today are platforms,
and their rapid scaling is enabled by a combination of four factors:
Minimal marginal costs of expansion. Platforms are asset-
light and serve primarily as the infrastructure that enables producers
and consumers to interact. Platform infrastructure often has large
fixed but low marginal costs, so the cost of scaling supply is minimal.
At the same time, demand continues to benefit from the superior
economics of the Internet. When Amazon moved to a platform model,
it scaled its supply without bearing the marginal costs of operations.
Platforms benefit from superior marginal economics on both supply
and demand.
Network effects. In an ecosystem, more production leads to more
consumption, and vice versa. This enables platforms to build large
businesses without investing heavily in ecosystem creation once
they achieve critical mass.
 The digital revolution is also creating radically new ap-
proaches to the way in which individuals and institutions engage
and collaborate. For example, the Blockchain, often described as
a ‘distributed ledger’, is a secure protocol where a network of com-
puters collectively verifies a transaction before it can be recorded
and approved. Bitcoin is so far the best known blockchain appli-
cation, but the technology will soon give rise to countless others.
3 BIOLOGICAL MEGATRENDS
It took more than 10 years — at a cost of $2.7 billion — to com-
plete the Human Genome Project, but today, a genome can be
sequenced in a few hours, for less than a thousand dollars. With
advances in computing power, scientists will no longer have to go
by trial and error; rather, they will test the way in which specific
genetic variations generate particular traits and diseases.
Synthetic biology is the next step. It will provide us with the
ability to customize organisms by ‘writing’ DNA. Setting aside
Virality. Platforms scale rapidly because users spread the word
to other users during the course of using the platform, and that
brings in new users who find an increasingly valuable platform
because of the network effects described above.
Intelligence. Finally, platforms scale because they scale
their data, their intelligence, and their ability to reliably match
producers with consumers over time. As the ecosystem scales,
the best platforms ensure that the relevance of its interactions
scale, as well.
For example, Apple and Android leveraged a platform
approach to beat the pipeline model of Nokia and BlackBerry;
Amazon became a platform when it opened itself up to
third-party merchants. Airbnb grows its accommodation
base through a platform approach and scales faster than
any hotel chain; Alibaba has used the platform approach
to transform Chinese commerce, and is increasingly transforming
finance in China; and traditional incumbents like BestBuy
and Walmart find it difficult to compete with Amazon’s
burgeoning platform.
Elsewhere, platforms like GoJek and Grab are
transforming public transportation in highly populated cities
across South Asia and are proving more effective than all
traditional public transportation measures. Moreover, their
impact on changing car ownership poses a significant threat
to the car manufacturing industry. Meanwhile, the car industry,
itself, is building out business models where the car acts as
a platform, capturing data about usage that can be leveraged
by a larger ecosystem consisting of after-sales service stations
and insurance firms to create new value for drivers in a highly
personalized manner.
the profound ethical issues this raises, these advances will not
only have a profound and immediate impact on medicine, but
also on agriculture and the production of biofuels.
Many of our intractable health challenges — from heart dis-
ease to cancer — have a genetic component. Because of this, the
ability to determine our individual genetic make-up in an efficient
and cost-effective manner (through sequencing machines used
in routine diagnostics) will revolutionize personalized health-
care. Informed by a tumor’s genetic make-up, doctors will soon
be able to make decisions about a patient’s cancer treatment.
The ability to ‘edit’ biology can be applied to practically any
cell type, enabling the creation of genetically-modified plants or
animals, as well as modifying the cells of adult organisms includ-
ing humans. The list of potential applications is virtually endless
— ranging from the ability to modify animals so that they can be
raised on a more diet economical or better suited to local con-
ditions, to creating food crops that are capable of withstanding
extreme temperatures or drought.
In closing
Platforms change the economics of participation, leading to the
creation of entirely new markets. They also uncover new sources
of supply. Platforms do not merely redistribute value, they create
new sources of value, by providing meritocratic market access and
simplifying the act of production.
As the fourth industrial revolution unfolds, platforms are
repeatedly disrupting ‘pipes’, leveraging their lower transaction
costs. To fight disruption, you need to closely evaluate your
business model and identify transaction costs that could be
eliminated in the future. Information-intensive industries have
been the first to be disrupted, but make no mistake: more
regulated industries like banking, education and healthcare
will soon feel the pressure.
Sangeet Paul Choudary is the founder of
Platform Thinking Labs. Geoffrey G. Parker
is a Professor of Engineering at Dartmouth
College and a visiting scholar at the MIT Initiative
on the Digital Economy. Marshall Van Alstyne
is a visiting scholar at the MIT Initiative on
the Digital Economy and a professor at Boston
University. They are co-authors of Platform
Revolution: How Networked Markets Are
Transforming the Economy and How to Make
Them Work For You (Norton 2016).
rotmanmagazine.ca / 23
 3D manufacturing will be combined with gene editing to Tipping Points Expected by 2025
produce living tissues for the purpose of tissue repair and regen-
eration — a process called ‘bioprinting’. This has already been 10% of people will be wearing clothes connected to
used to generate skin, bone, heart and vascular tissue. Eventu- the Internet 91.2%
ally, printed liver-cell layers will be used to create transplant
organs. We will soon be confronted with new questions around 90% of people will have unlimited and free 91%
what it means to be human, what data and information about our (advertising-supported) storage
bodies and health can or should be shared with others, and what
1 trillion sensors will be connected to the Internet 89.2%
rights and responsibilities we have when it comes to changing the
very genetic code of future generations.
The first robotic pharmacist 86.5%
Discussions about the opportunities and challenges of these
capabilities are underway. Notably, in December 2015, the Na- 10% of reading glasses will be connected to the Internet 85.5%
tional Academy of Sciences and National Academy of Medicine
of the U.S., the Chinese Academy of Sciences and the Royal So- 80% of people will have a digital presence on the Internet 84.4%
ciety of the UK convened an International Summit on Human
Gene Editing. Despite such deliberations, we are not yet pre- The first 3D-printed car will be in production 84.1%
pared to confront the realities and consequences of the latest
The first government will replace its census
genetic techniques.
with Big Data sources 82.9%

In closing The first implantable mobile phone will be available 81.7%

Innovation is a complex social process, and not one that we commercially
should take for granted. To foster ground-breaking fundamen-
tal research and innovative technical adaptations across aca- 5% of consumer products will be printed in 3D 81.1%
demia and business alike, governments should allocate more
aggressive funding for ambitious research programs. Equally, 90% of the population will be using smartphones 80.7%
public-private research collaborations should increasingly be
90% of the population will have regular access 78.8%
structured towards building knowledge and human capital to
to the Internet
the benefit of all.
Driverless cars will equal 10% of all cars on U.S. roads 78.2%

The first transplant of a 3D-printed liver will occur 76.4%

30% of corporate audits will be performed by AI 75.4%

Tax will be collected for the first time by a government 73.1%

via the Blockchain

Globally, more trips/journeys will occur via car sharing 67.2%

than in private cars

10% of global gross domestic product will be stored 57.9%

on blockchain technology

The first AI machine will sit on a board of directors 45.2%

SOURCE: WORLD ECONOMIC FORUM SURVEY OF BUSINESS LEADERS

Klaus Schwab is the founder and executive chairman of

the World Economic Forum and the author of The Fourth
Industrial Revolution (World Economic Forum Press, 2016).
Along with his wife Hilde, he co-founded the Schwab
Foundation for Social Entrepreneurship.

24 / Rotman Management Fall 2016

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HELPING TO BUILD A MORE SUSTAINABLE

ROTMAN SCHOOL OF MANAGEMENT

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 The Disruption
Dilemma
Successful firms that are disrupted are not necessarily
poorly managed; instead, they choose to continue on the path
that brought them to success.
by Joshua Gans
DISRUPTION IS AN OVER-USED TERM THESE DAYS, rendered almost use-
less as a conveyer of meaning. We need to shed the additional
baggage that comes with the term as it is used today — in par-
ticular, the notion that the stumbles of every established firm are
the consequence of disruption. At the same time, we need to hold
onto the term’s essence, because disruption is something that
firms the world over remain at risk of.
For the purposes of my research, I define disruption as ‘what
a firm faces when the choices that once drove its success become
those that destroy its future’. This allows us to see disruption as a
legitimate phenomenon, but also provides a means of explaining
when a situation facing a firm is not in fact disruption, but some-
thing else entirely.
From Blockbuster to Disaster
If disruption has a modern poster-child, it is surely Blockbust-
er video. In 2004, Blockbuster dominated the U.S. video/DVD
rental market (and others around the world) with 9,000 stores,
taking just under two decades to get to that position. By 2010, it
had filed for bankruptcy, with its number of outlets shrinking to
just a third of its peak.
Blockbuster was built on the wave of the home video revo-
lution that started in the 1970s and progressed throughout the
1980s, with the videocassette recorder (VCR) becoming a com-
mon household product. Video libraries sprung up everywhere,
allowing people to rent movies at prices that depended on wheth-
er the film was a recent release or not. Blockbuster invested
heavily in a global retailing brand that allowed it to dominate the
video library market through to the 1990s — often using its power
to negotiate favourable deals with suppliers of videos and DVDs.
The usual narrative on Blockbuster’s failure is a relatively
simple one. It began with a technological trigger: the DVD. In
the late 1990s, a start-up, Netflix, entered the video rental mar-
ket off the back of the new DVD standard that was just taking
rotmanmagazine.ca / 27
 Disruption is what a firm faces when the choices that once
drove its success become those that destroy its future.
off. Up until that time, if you wanted to rent a movie, you had
to travel to a store, select a DVD (or video), watch it, and then
return it to the same store.
Netflix’s idea was to use postal delivery instead. DVDs were
lighter and cheaper than their video cassette counterparts, mak-
ing delivery potentially cost effective. Crucially, Netflix’s initial
model only appealed to some consumers, as it required people
to plan their DVD watching a few days ahead of time. It also,
initially, could not guarantee the movie you wanted — potentially
leaving you high and dry on a Saturday night.
While the idea for Netflix was motivated by late fees charged
for video rentals to its founder, Reed Hastings, Netflix initially
also charged those fees. In 2000, it changed its business model,
moving to a subscription service that allowed consumers to keep
DVDs for as long as they wanted. In effect, people could borrow
as often as they liked, without thinking beyond a set monthly fee.
Consumers loved this model, and Blockbuster and the bricks and
mortar video rental industry were doomed.
What makes this a possible story about disruption goes a bit
further than the ‘entrant supplies product that consumers prefer
to incumbent’ narrative. That’s because there was nothing stop-
ping Blockbuster from imitating what Netflix did. In hindsight,
it didn’t have to be destroyed. Indeed, in 2000, Blockbuster de-
cided to pass on the opportunity to buy Netflix for a mere $50
million; today, Netflix is worth over $26 billion.
In 2002, facing concerns about Netflix’s growth, Block-
buster told its shareholders that Netflix was ‘not financially
viable’ and was ‘only serving a niche market’. By 2004, at the
peak of Blockbuster’s success, it hedged its bets by offering a
DVD-by-mail service with an additional option of allowing in-
store exchanges. Despite this, Netflix led, and never fell back in
total subscribers.
The Blockbuster story highlights three key aspects of a firm fail-
ing because it is being disrupted:
1. DISRUPTION IS OFTEN ASSOCIATED WITH A NEW TECHNOLOGICAL
OPPORTUNITY. In Blockbuster’s case it was the DVD, and later,
streaming on the Internet, that changed the economics of video
delivery and search. We will term this the disruptive event.
28 / Rotman Management Fall 2016
2. THE INCUMBENT HAS A SIMILAR ABILITY TO EXPLOIT THE NEW OPPOR-
TUNITY AS OTHERS. While this is often the case, it is not always the
case. For instance, an entrant may hold a lock-hard patent on the
new opportunity, or it may require a completely different set of
technical know-how that the incumbent does not possess.
3. THE FAILURE TO TAKE ADVANTAGE OF THAT OPPORTUNITY CANNOT BE
RECOVERED. Blockbuster ceded the new business model to Netflix
in such a way that there was nothing left of value in its business.
That does not always occur when new firms enter a market: there
may be something still of value in the incumbent firm, which can
mean the difference between being disrupted or not.
The Origins of Disruption
If disruption has a figurehead, his name is Joseph Schumpeter
(1883-1950). Although he ended up as a professor in Harvard’s
Economics department, Schumpeter was a far cry from your ivo-
ry tower stereotype. Economists then, as now, tended to think of
capital goods like machines as earning their own due, but Schum-
peter could not imagine a world where people who did nothing
but own a machine actually earned a living from it. Those re-
turns would be competed away by the owners of other machines
and the competition for workers to operate them. Instead, the
only people who were doing something that could generate
a profit were those generating and bringing ideas to market:
entrepreneurs.
Entrepreneurs are the heroes of Schumpeter’s world, and
his image of them lives on in the view of many today. But for all
their worth in keeping the system alive and growing, the entre-
preneurial reward was itself fleeting. Put simply, once an idea
was ‘out there’, it could be copied by others. Thus, we have a pic-
ture of entrepreneurial pioneers foraging for transient rewards
and, in the process, keeping the system going; although later
in life Schumpeter did forecast that those talented individuals
would wise up, routinize innovation and drive the interesting bits
of the system away in a corporate malaise.
In 1942, in his book, Capitalism, Socialism and Democracy,
he introduced the concept whose lineage to disruption can be
most clearly seen: Creative Destruction. For Schumpeter, the
term was a description of what he believed to be an endemic
feature of capitalism: that it made room for creativity by de-
stroying what had come before it.
Like Marx before him, Schumpeter found evolution rather
than equilibrium to be the appropriate narrative for what was oc-
curring in the economy. In fact, the changes from agriculture to
industry he saw as “a history of revolutions.” The opening up of
new markets, foreign or domestic, and the organizational devel-
opment from the craft shop and factory to such concerns as U.S.
Steel illustrate the same process of industrial mutation that in-
cessantly revolutionizes the economic structure from within, in-
cessantly destroying the old one, incessantly creating a new one.
He goes on: “This process of Creative Destruction is the essential
fact about capitalism.”
Schumpeter was not trying to explain why successful firms
fail. Instead, his goal was to challenge the perception many econ-
omists and politicians held at the time, and demonstrate that
big businesses operating in monopolistic conditions were not as
menacing as many were making them out to be. Once it was un-
derstood that their moment was somewhat fleeting, economists
could focus on whether the system was performing well over
the long-run. It is here that was born the notion that success in
the capitalistic system is precarious, and that there is no natural
birthright to a lifelong annuity of profitability.
The Technological Link
By the 1980s, it was obvious to many economists that some firms
could hold their positions in industries for many decades, seem-
ing to respond to new technologies and innovations quite well.
For example, after Netflix dominated the DVD subscription busi-
ness, it was able to easily migrate its consumers over to Internet
video streaming. But, as the Blockbuster example shows, there
are other types of innovations that incumbents fail to respond to.
The disruptive innovation for Blockbuster was not just DVDs but,
on a broader level, an alternative business model for getting mov-
ies to consumers.
In the generation following Schumpeter, researchers won-
dered: what types of technological change would spell trouble for
incumbents? The natural starting point was to look at ‘techno-
logical discontinuities’. Italian researcher Giovanni Dosi argued
that there appeared to be ‘technological paradigms’ that were
akin to Thomas Kuhn’s ‘scientific paradigms’ and performed
a similar role in changing everything. Sailboat manufacturers,
for example, were left in the wind as steam proved faster. Dosi
argued that those businesses on the old technological path were
focused (as they had to be), but that also made them blind to ob-
jectively evaluating the new path.
This notion was reinforced by McKinsey Director Richard
Foster, who observed that many broad technologies exhibited an
‘S-Curve’ relationship between effort devoted to improvements
and the rate of improvement in the performance of those tech-
nologies on any given metric. A brief refresher on S-Curves: the
‘S’ refers to the fact that when a technology is new, it takes lots
of effort to improve performance even slightly; however, at some
point, that relationship flips and small amounts of effort lead to
rapid improvement. Sadly, this process reaches a conclusion with
a flip back in the relationship, eventually leading to a plateauing
technological limit to performance.
For Foster, combining the S-curve with the notion of a tech-
nological discontinuity raised an important issue for managers
of established firms. Namely, it was often the case that a new
technology path (or S-Curve) had lower performance than the
existing one. In other words, as an incumbent, you would ratio-
nally make a decision to continue to focus on the existing S-curve
rather than the new. Foster argued that new entrants into an in-
dustry were not so encumbered with the focus issue and so were
more willing to explore the new technology path; if they could
do so until the S-curve bent upwards and control the technology
through that point, the entrant would eventually outcompete the
incumbents. That is, if they attacked the new technology with
effort, they could take over the advantage.
The notion of multiple S-curves was the starting point for
Harvard Professor Clayton Christensen who, at once, both
narrowed and expanded Foster’s notion. He narrowed it by di-
vorcing it from many preceding theories on technological discon-
tinuities. In particular, Christensen believed that not all techno-
logical discontinuities led to worse performance of the products
of incumbent firms. In fact, some incumbents appeared to have
developed radical technological changes that integrated smooth-
ly into their existing products.
In other words, a technological discontinuity and a move to a
rotmanmagazine.ca / 29
new S-curve was not always associated with underperformance,
as Foster had emphasized; instead, the change in performance
could be upwards. Christensen also dramatically expanded on
the factors that may pose risks for incumbents. While in his initial
work, a technological change seemed to precipitate incumbent
challenges, he later saw that innovations in their broadest terms
— including technologies, new markets and new business models
— could all pose difficulties for incumbents. Christensen saw a
particular sort of technology as posing a challenge to established
firms, and its definition is instructive:
“[These technologies] have two important characteristics:
first, they typically present a different package of perfor-
mance attributes — ones that, at least at the outset, are not
valued by existing customers. Second, the performance at-
tributes that existing customers value improve at such a
rapid rate that the new technology can later invade those
established markets.”
A technology satisfying these criteria was termed by Christensen
as ‘disruptive’, while all others were considered ‘sustaining’; that
is, they improved the performance of established products.
Two Sources of Disruptive Innovation
In The Innovator’s Solution, Christensen and co-author Michael
Raynor distinguished between two sources of disruptive innova-
tion: low-end and new market.
Low-end disruption was captured by the definition given here
in that the entrant’s product was able to capture some fringe of
the customers of the established firms; usually because those
customers were purchasing a product that was too expensive
relative to the value they were receiving. New market disruption
occurred when the firm introducing the new disruptive innova-
tion was able to capture customers who were not consuming the
product of established firms at all (i.e., the new innovation was
able to attract people in from non-consumption).
A quick note here for entrepreneurs seeking to enter a mar-
ket with a disruptive innovation: it is a useful process to think
about who is underserved by established firms and who is poorly
served by them. Either way, this is a point of vulnerability for es-
30 / Rotman Management Fall 2016
tablished firms.
Christensen’s primary example of a disruptive technology
came with new generations of hard-disk drives that offered a
smaller size but at the initial expense of lower capacity, only to
recover that performance gap in a few years. The disruptive in-
novation in DVD rentals is harder to objectively see. For DVD
rentals, the performance dimensions were in the product space
and positioning rather than pure technology. Netflix sacrificed
the ‘impulse’ nature of DVD rentals that Blockbuster had built its
business on, choosing not to compete with brick-and-mortar out-
lets. By contrast, Netflix offered a superior outcome to those who
were happy to plan ahead or doubted their ability to return DVDs
to a store on time. Initially, this was a niche customer segment in
the video rental market, with most consumers continuing their
old video renting habits of heading to a local video store.
To complete the story, however, we need to identify where
Netflix caught up. Until on-demand video streaming arrived, it
did not catch up with regard to impulse viewing; DVDs by post
could never satisfy that requirement. But Blockbuster was al-
ready having trouble before streaming dominated video delivery.
Instead, Netflix, like so many online retailers, was able to trump
brick-and-mortar outlets on the basis of variety. Netflix could
bring viewers the ‘long tail’ of video content — offering many
times more titles than were available in a Blockbuster store.
It remains to be seen how Netflix’s story will play out. This
suggests that, while Christensen’s two criteria for a disruptive
innovation are easy to describe, it can be difficult to identify
precisely whether they have been satisfied for a given individ-
ual case.
An Alternative Perspective
There is a final chapter in the story of disruption’s origins. At the
same time as Christensen was working on his PhD at Harvard,
another student, Rebecca Henderson, was interested in the
same phenomenon and set forth a research program that impact-
ed a generation of management scholars.
Henderson was concerned, specifically, with the difficul-
ties incumbent firms had in responding to entrants. For her, it
was not so much that those firms chose at critical points not to
respond (i.e. Christensen’s focus) but that there were some sorts
 It is useful to think about who is underserved by established
firms and who is poorly served by them. Either way,
this is a point of vulnerability for established firms.
of technologies or innovations that they could not respond to.
Along with her collaborator, Kim Clark, she termed these ‘archi-
tectural innovations’.
Henderson and Clark pointed out that a ceiling fan is made
up of blades, motors, a blade guard, control system and mechani-
cal housing. Each of these are components, but how they are de-
signed to work together is a fan’s architecture. For Henderson,
many firms become successful because they can out-compete
rivals in product improvements. The quickest way to do that is to
organize for component innovation. But what happens if a new
technology comes along that changes the architecture of a prod-
uct— that is, how the components relate to one another? For suc-
cessful firms organized around ‘component innovation’, thinking
about how to recognize and deal with new architectures is a chal-
lenge.
In a sense, Netflix’s innovation involved a new architecture.
Blockbuster had become excellent in managing inventory and
processes to ensure customers had a satisfactory experience in
its stores. However, what Netflix was doing was ensuring that it
had a new logistical approach that could efficiently deliver DVDs
directly to people’s homes. That involved machinery to sort and
deliver DVDs to post offices and then to handle the DVDs as they
returned to Netflix. It also required, eventually, a new business
model based on subscriptions.
Blockbuster’s business model defined success by ensuring
regular flow through its physical stores. Thus, the entire organiza-
tion was designed to ensure that consumers came in and walked
out with something, leaving some money behind. To graft onto
that an alternative channel was difficult, as that channel would
not only challenge the economics of the stores, but also the in-
centive structures that supported them. This is precisely why
new architectures can be more readily brought to market by en-
trants than incumbents.
We now have two types of innovation that can lead to disrup-
tion: for Christensen, the innovations are ‘customer-disruptive’
in that they initially under-perform, but then rapidly improve
performance for an established firm’s customers; and for Hen-
derson, the innovations are ‘architecturally-disruptive’ in that
they initially make it hard to innovate on component improve-
ments, but then later allow for rapid improvements as the new
architecture is understood. I refer to Christensen’s customer-
disruptive innovation as disruptive innovation and Henderson’s
disruptive innovation as architectural innovation.
Seen in this light, what Netflix brought to the industry was
an innovation that was both disruptive and architectural. For
Blockbuster to respond, it had to be convinced (a) that its current
customers wanted what Netflix had to offer; and (b) that it should
re-organize its entire business to respond to the threat. Suffice
to say, at the time, it was not clear to anyone at Blockbuster that
those conditions had been met.
In closing
In 2011, satellite broadcasting provider Dish Network purchased
Blockbuster for $320 million: an amount less than its annual late
fee revenues when Netflix was gaining initial traction. So, Block-
buster actually lives on as a brand with Dish’s Blockbuster On
Demand service. From an industry giant to a brand on a broad-
casting channel, the Blockbuster case reveals many of the nu-
ances related to disruption.
As indicated herein, successful firms that are disrupted are
not complacent or poorly managed. Instead, they choose to con-
tinue on the path that brought them to success. And it is precisely
because of this that they are disrupted.
Joshua Gans is the Jeffrey Skoll Chair of Technical Innovation
and Entrepreneurship and Professor of Strategic Management
at the Rotman School of Management. A Fellow of MIT’s
Center for Digital Business, he is the author of The Disruption
Dilemma (MIT Press, 2016), from which this article is adapted.
He blogs at digitopoly.org.
Rotman faculty research is ranked #3 globally by the Financial Times.
rotmanmagazine.ca / 31
 So You Think
You Can Innovate?
How Innovative
Leaders Create Value
To be an innovative leader, you don’t have to come up with all the ideas.
You just have to set the stage for others to push boundaries — every day.
by Andrew Atkins and Michael Seitchik
WHEN LEADERS LAY AWAKE AT NIGHT, trying to figure out how their
businesses can become the next Apple, Amazon or Uber, they
often focus on how they themselves can generate the next big
idea. What they don’t appreciate is that innovation isn’t about
leaders’ ideas: it’s about enabling great ideas to be born and
flourish. The essential role of the leader is to shepherd creativity
through to productivity. How to go about it, is the question.
Our research has revealed some very specific, often less
talked-about qualities of leaders that are likely to produce valu-
able innovation. Furthermore, we’ve learned that these behav-
iours can be measured — and that you can coach people to de-
velop them.
You may be surprised that the leader you assume should
be championing innovation may not be good at it at all. For
instance, a leader who is steeped in the industry and on top of
trends is not necessarily more likely to lead her organization to
innovation. Nor is the leader who is personally creative. Distin-
guishing behaviours of innovative leaders go much deeper — to
issues of substance and character.
Using a validated, research-based model of executive pres-
ence and influence, we have assessed and worked with hundreds
of senior leaders and companies to help them move their organi-
zations forward. We have also produced data that highlights be-
haviours that correlate with critical business outcomes, including
innovation. In this article we will summarize our findings to date.
Creating an Innovative Environment
Innovation is no longer a novelty or a luxury for organizations.
These days, it is at the core of whether a business survives and
thrives. Yet when leaders think about innovation, they tend to fo-
cus more on an end-product or service — and less on how to get
there. This can lead them to focus on the wrong things.
Our findings underscore that the primary role of the inno-
vative leader is to establish the context in which a team can in-
novate. This involves getting things done, through interactivity,
inclusiveness and intentionality. These and other qualities ignite
a sense of shared purpose and foster healthy debates that spark
and sustain innovative thinking.
While our research has yielded new insights about innova-
tive leaders, our overall findings are consistent with underlying
principles in the latest academic research, including that of Har-
vard Business School Professor Linda Hill. In Collective Genius,
Prof. Hill and her colleagues conclude that organizations that
consistently innovate have leaders that create an environment
that supports innovation. This requires creating a community
that can “share a sense of purpose, values, and rules of engage-
ment” and “generate ideas through discourse and debate.”
Our findings also align with the observation that Ed Cat-
mull, president of Pixar Animation Studios, shared in Creativi-
ty Inc., that what often holds innovation back is fear of failure. The
antidote for fear, he writes, is creating a trusting environment,
rotmanmagazine.ca / 33
 How to Build Trust, Establish Credibility and Drive Execution:
The Bates Executive Presence Index

CHARACTER: Five qualities are funda- SUBSTANCE: Five qualities inspire STYLE: Five qualities are overt, skill-
mental to the leader as a person, to his/her commitment, inform action, and lead to based patterns of communicative
identity, and give us reason to trust him/her. above-and-beyond effort. leadership that build motivation and
shape and sustain performance.

Authenticity – being real, genuine, Practical Wisdom – displaying highly Appearance – looking and acting like
transparent, and sincere in one’s relations honed qualities of insight and judgment an able executive, adapting dress and
and interactions with others. that get to the heart of issues and produce demeanor to the situation, and handling
prudent decisions. social situations with tact.

Integrity – acting with fidelity to one’s Confidence – being self-assured Intentionality – clarifying direction and
values and beliefs, living up to high in decision-making and action; ready keeping actions aligned and on track, all
standards of morality and promise to accept the risk and responsibility without stifling dissent or neglecting needs
keeping. for taking timely action. to adjust course.

Concern – demonstrating interest Composure – proving to be steady in Inclusiveness – actively involving

in others, encouraging adaptive a crisis, able to calm and focus others, others, welcoming diverse points
development, and promoting a healthy, and to bring objectivity and perspective of view, encouraging ownership in
sustainable culture. to critical decisions. mission, and empowering initiative.

Restraint – displaying a calm
disposition, characterized by
reasonableness and by avoidance
of emotional extremes or impulsiveness.
Humility – showing awareness of one’s
strengths and weaknesses, an openness
to others, and a belief that all persons
have worth.
Resonance – connecting with others;
being attentive, attuned, and responsive
to feelings, motivations, and thoughts.
Vision – generating an inspiring,
enterprise-wide picture of what could
be; recognizing emerging trends, and
engaging all in strategy.
Interactivity – promoting an interpersonal
style of dialogue and timely exchange
of information and questions to coordinate
action.
Assertiveness – speaking up, valuing
constructive conflict, and raising issues
directly without shutting others down.

FIGURE ONE

so that people feel safe in taking the risks necessary to innovate.
We analyzed data gathered from more than 700 executives
using a multi-rater assessment called the Bates Executive Presence
Index (ExPI™). The ExPI is a validated instrument measuring
perceptions of a leader’s ability to build trust (‘character’), estab-
lish credibility (‘substance’), and drive execution through others
(‘style’). While the ExPI assesses behaviours, we were also able to
determine how these leaders were able to achieve key business
outcomes by looking at raters’ comments. In the analysis that fol-
lows, we contrast the ratings of leaders who — on an unprompted
basis — were singled out either positively or negatively with re-
spect to innovation by their raters.
We compared leaders who received positive comments
about their ‘innovativeness’ to those who received negative
comments on this measure, using a ‘t-test’. We found that of
the 90 items on the ExPI — which are clustered into 15 facets
(see Figure One) — 57 showed a statistical difference at the .01
level of significance. In other words, on those 57 items, we can
be 99 per cent confident that innovative and non-innovative
leaders are different with respect to displaying the behaviour
described. Another nine items were significant at the .05 level
(or at a 95 per cent confidence level.)
Having established the ExPI’s ability to differentiate inno-
vative leaders, we explored what insights it could provide into
the behaviours that support innovation. First, we looked at what
items did not distinguish innovative leaders. That is, we looked
at the other end of the t-test values — where the differences be-
tween the two groups were the smallest. In particular, three items
did not distinguish the two groups from each other:
• Calm, thoughtful style helps make sensitive issues discuss-
able.
• Self-assured enough to invite and consider dissenting views.
• Knows the industry, latest trends, and where things are
going.
In other words, the degree to which executives make sensi-
tive issues discussable, invite dissent and display knowledge of
their industry was the same for both groups. We also saw clearly
that ‘being the smartest person in the room about the business’

34 / Rotman Management Fall 2016

 Once they establish a safe environment
and create alignment on goals, innovative
leaders intentionally facilitate debate.
was not a factor in being seen as innovative. However, when
we looked at items that showed a significant difference between
the two groups, our data showed that displaying the opposite be-
haviours made a difference. For example, admitting that you
don’t know all the answers mattered. Two items under the facet
of Humility that were significant at the .001 level were:
• Knows he/she doesn’t have all the answers; and
• Values the truth more than being the one with all the
answers.
As indicated, our data shows that the best leaders of innova-
tion are not necessarily those who come up with the best ideas
themselves. So what exactly do they do to influence innovation?
This is where a second group of characteristics comes into play.
While both groups invited dissent and made sensitive issues
discussable, the innovative executives went further: beyond just
asking for differences, they proactively facilitated healthy, con-
structive debate that worked through these differences. They
also intentionally created the safe environment needed for
team members to freely express their ideas, concerns and feel-
ings. In short, these leaders did not avoid conflict: they sought it
out. They wanted the best idea to win, and they believed that no
one knows who has the best idea unless all ideas are heard and
vetted. Simply put, they took steps to release the wisdom of the
group by driving a discovery process. These innovative leaders
scored higher on items such as:
• Even when giving hard-hitting feedback, his/her positive in-
tentions are clear;
• Others find that his/her deliberative style clarifies their
thinking;
• Frequently a source of stability when others are flustered;
and
• Often able to help others clarify their concerns or feelings.
That is, the innovative leaders had a deliberate style that helped
people express their ideas and created a stable, safe environment
for giving and receiving feedback on those ideas. Through their
consistent actions, they managed to reduce uncertainty and risk
by making sure that everyone was aligned around common goals
and values. These individuals scored significantly higher on
items such as:
• Helps us find common cause to accomplish challenging
goals;
• Creates an enterprise-wide view of challenges and opportu-
nities; and
• Goals and plans are both credible and inspiring.
Once they establish a safe environment and created alignment
on goals, innovative leaders intentionally facilitate debate. For
example, they scored significantly higher on items such as:
• Does not shy away from making his/her opinions, views and
reactions known;
• Speaks his/her mind and can be firm without seeming harsh
or shutting down discussion;
• Challenges other points of view for a purpose and expects a
reasonable response;
• Believes we can disagree without being disagreeable;
• Actively involves those who have a stake in the issues and
a relevant viewpoint to offer;
• Recognizes that inclusion implies a tolerance for different
ways of doing things;
• Expresses a refreshing curiosity and interest in the ideas of
others; and
• Seems to always ask the right questions.
Thus, while both innovative and non-innovative leaders had the
same level of industry expertise and both solicited differences,
the most innovative leaders did the hard work of working through
those differences in the service of the enterprise and a common
purpose. Yes, they expressed their own opinions, but they also
expected pushback. By asking tough questions, they modeled
behaviour that showed that the team could — and should — dis-
agree, without being ‘disagreeable’. Importantly, they didn’t just
foster creativity, they drove execution by providing a process
for translating the vision of ‘what could be?’ into actionable
innovation.
The Female Advantage
Another interesting aspect of our research came from looking
at gender differences in the leadership behaviours that support
an innovative culture. We found that of the 30 items that distin-
guished innovative leaders from non-innovative leaders at the
very highest level (0.001 or 99.9% confidence) women’s ratings
rotmanmagazine.ca / 35
 Instilling a Growth Mindset to Drive Innovation by Zia Zaman
For the past year, as the head of innovation at MetLife Asia and
running our incubator, LumenLab, I have been working with our
teams to create disruptive business models that drive growth. Rei-
magining insurance — by moving beyond the current definition of
what insurance could or should be — is our objective. In pursuing
it, we have discovered that we can maximize our impact not just by
building businesses, but also by affecting culture change.
Specifically, it has become clear that to achieve our objective,
we need to instill a growth mindset in our people. As defined by
Stanford Psychology Professor Carol Dweck, a growth mindset is
an attitude about approaching challenges that embraces explora-
tion, experimentation and collaboration. The research of Prof.
Dweck and others shows that fostering this mindset helps innova-
tors move an organization past an outmoded reliance on strict
hierarchies and systems towards agility, bravery and inventive
value creation. Per Prof. Dweck, individuals with a growth mindset
have been found to possess four characteristics:
• They are Hyper-Curious;
• They are Passionately Transparent;
• They are Super-Social; and
• They are Adaptive.
Very few people exhibit all four of these traits — which is why it
is so important to build a team that brings all of these qualities
together. Anchored by these characteristics, a growth mindset
fosters four behaviours that are essential to innovation:
were significantly higher on 10 of those items, and men’s ratings
on only one. On average, women scored higher than men on
items including:
• Humility: knows he/she doesn’t have all the answers.
• Resonance: adept at reading non-verbal behaviours; helps
clarify concerns and feelings.
• Inclusiveness: actively involves others with different points
of view; tolerant of different ways of doing things; expresses
curiosity in ideas of others.
Men, on average, scored higher on one item under Authenticity:
Shares the life lessons that underlie his/her views and beliefs.
We found that on average, women are perceived to be better at
creating an environment that supports and sustains innovation.
In particular, women are seen as more likely to intentionally cre-
ate a process for including and supporting the expression of dif-
ferent points of view.
In closing
Our research has enabled us to measure executive behaviours
that are highly correlated with leading innovation. In addition,
other research we have conducted shows that with follow-up
coaching, a noticeable difference can be made in the frequency
of these behaviours. In short, you can help make innovative and
36 / Rotman Management Fall 2016
Intellectual honesty. The outmoded command-and-control
style of management assumed that ‘the company knows best. A
growth mindset requires reaching out to customers to enlist them
in co-creating new products and solutions. One way in which we’ve
cultivated this behaviour at LumenLab is by building a customer
communication platform called Misir, which we launched in
Bangladesh. Akin to TripAdvisor, it is busting myths by directly
asking customers what they really want. For example, it showed us
that customers would pay more for a simpler insurance product.
Our finding: Individuals who are Hyper-Curious and Passionately
Transparent tend to be strong in this domain.
Working out loud. This phrase was introduced by John Step-
per in his book of the same title, in which he describes an ‘open,
generous, connected approach to work’. Stepper created a social
collaboration platform for Deutsche Bank that is used by 60,000
employees and has helped to facilitate this work style. At LumenLab,
we’ve taken a page from his playbook and we encourage organiza-
tions to train employees to be more collaborative, sharing ideas
and criticisms freely. Our own approach is exactly analogous to the
Blockchain — a disruptive distributed public-ledger technology with
which we are experimenting. Our finding: Those who are Passion-
ately Transparent and Super-Social tend to be strong in this area.
Experimenting collaboratively. At many companies, targets for
the year are set in stone in the annual plan and teams compete for
non-innovative leaders alike more likely to foster innovation.
Remember, as a leader, your job is to lead: you didn’t get
hired to come up with ‘the next big thing’ on your own. Your job
is to hire and then release the creative forces of the talent in your
organization. Innovative leaders get lots of people into the game,
actively solicit ideas and create group dynamics that enable the
best ideas to get discussed and implemented.
In the end, innovative leaders see their role as that of a fa-
cilitator, shepherding ideas every day. From the types of meet-
ings they hold to the ways they encourage collaboration, for these
leaders, fostering innovative behaviour isn’t an annual exercise,
it’s ‘business as usual’.
Andrew Atkins is a Principal with Bates Com-
munications. In 2014 and 2015 he was named
a Top 100 Thought Leader by Trust Across
America. Michael Seitchik is Director of Re-
search and Assessment at Bates. His work on
executive development has been featured in The Wall Street Journal, The New
York Times and The Globe and Mail.
funding and accolades. Veering from plan is shunned, rather than en-
couraged as necessary to adaptation. People are held accountable
for doing what they’ve said they will do, even in the face of dramatic
change in the market. At LumenLab, we teach adaptive thinking to
senior management and encourage agility, experimentality, bravery,
velocity and transparency. One exercise we use is ‘the marshmallow
challenge’, in which we give teams 18 minutes to build as high a struc-
ture as possible using only spaghetti, string, tape and a marshmallow.
The teams that succeed invariably experiment iteratively with work-
ing prototypes, and those that fail start by planning and allocating
roles, leaving no time to try alternatives. Our finding: Individuals who
are Super-Social and Adaptive tend to be strong in this area.
Unlearning and Relearning. Workers with a growth mindset are
self-professed lifelong learners, and this entails not only constantly
learning new things but consciously unlearning some of the things
they’ve mastered and opening their minds to different approaches.
An associate from our Tokyo office exhibited this behaviour bril-
liantly when we worked with him to help him create a new brain-food
assessment business. At first, he kept asking exactly what KPIs he
needed in order to get the next round of funding from LumenLab,
and what it would take to ‘make plan’. He had been trained to think
of business as though it were an exam; but he soon unlearned that
thinking and adopted new practices. He now embraces running
experiments, and while in the past he relied on carefully- scripted
market research surveys, he realized they didn’t provide the authen-
tic customer input he needed, so now he relies only on data that he
has personally captured from real, paying customers. Our finding:
Individuals who are Adaptive and Hyper-Curious tend to be strong
in this area.
To instill a growth mindset in your team — or across your entire
company — you will likely have to bring in some new blood, as
some of the growth-mindset characteristics — Hyper-Curiosity and
Super-Sociality — can’t be taught. But managers must also focus on
cultivating in the existing workforce the characteristics and behav-
iours that can be taught.
In today’s environment, workers must no longer regard
themselves as custodians of their brand; instead, they need to
be ‘reinventors of the brand experience’. This mindset shift has
become the principal work of leading innovators like GE, Citi,
and MetLife. Innovation is less about building a process to
commercialize ideas; it’s about reorienting your talent to build
a culture that adapts and finds new ways to grow.
Zia Zaman is the Senior Vice President of Innovation
at MetLife Asia and founder and CEO if its LumenLab
incubator. He is based in Singapore.

Four Characteristics of the Growth Mindset

Definition Archetypes How To Find Them Teachable or Innate?

Hyper-Curious Insatiable learners, Jeff Bezos Multi-disciplinary, Innate

parallel thinkers who intellectually honest,
wonder Arianna dot-connector
Huffington

Passionately Individuals who value Justin Trudeau Master influencers, large Teachable
Transparent authenticity, share # of Twitter followers,
everything they do, and Zinedine Zidane Blockchain evangelists,
are unabashedly open. profilic writers

Super-Social Highly connected Malala Yousafzai Facebook followers, Innate

people who work connectors, type-A ring-
almost exclusively Sheryl Sandberg leaders, Kickstarter
in teams and get
validation from others

Adaptive Experimental doers who Elon Musk Entrepreneurial Teachable

recognize and adapt to experiences,
strategic uncertainty Madonna demonstrated ability
and help guide others to pivot, career-
jumpers, reverse-
mentors

rotmanmagazine.ca / 37
 PHOTOS

OUT OF
ORDER
GOODBYE
LINEAR
THINKING:
Hello Exponential!
Our brains were not designed to process at the scale or speed
of today’s ‘exponential’ world. Learning ‘the 6Ds’ can help.
by Peter Diamandis and Steven Kotler
THE YEAR WAS 1878, and George Eastman was a 24-year-old junior
clerk at the Rochester Savings Bank in dire need of a vacation.
He decided to go to Santo Domingo, in the Dominican Republic.
At the suggestion of a co-worker, Eastman purchased all of the
requisite photographic equipment to record the trip: a camera
as big as a Rottweiler, a massive tripod, a jug of water, a heavy
plateholder, the plates themselves, glass tanks, an assortment of
chemicals, and, of course, a large tent — this last item providing a
dark place in which to spread emulsion on the plates before expo-
sure and a dark place to develop them afterwards.
Eastman never did go on that vacation; instead, he became
obsessed with chemistry. Back then, photography was a ‘wet’
art, but Eastman — who craved a more portable process — heard
about gelatin emulsions capable of remaining light-sensitive af-
ter drying. Working at night in his mother’s kitchen, he began to
experiment with his own varieties. A natural-born tinkerer, East-
man took less than two years to invent both a dry plate formula
and a machine that fabricated dry plates. The Eastman Dry
Plate Company was born.
More tinkering followed. In 1884, Eastman invented roll
film; and four years later he came up with a camera capable of
taking advantage of that roll. In 1888, it became commercially
available, later marketed under the slogan ‘You press the button,
we do the rest.’ The Eastman Dry Plate Company had become
the Eastman Company, but Eastman wanted to call it something
‘stickier’ that people would remember and talk about. One of his
favorite letters was K. In 1892, the Eastman Kodak Company
was born.
In those early years, if you would have asked George East-
man about Kodak’s business model, he would have said the com-
pany was somewhere between a chemical supply house and a
dry goods purveyor (if dry plates can be considered dry goods).
But that changed quickly. “The idea gradually dawned on me,”
he once said, “that what we were doing was starting to make
photography an everyday affair.” Eastman later said he wanted to
make photography “as convenient as a pencil,” and for the next
100 years, Eastman Kodak did just that.
The Memory Business
In 1973, Steven Sasson was a freshly-minted graduate of the
Rensselaer Polytechnic Institute. His degree in Electrical Engi-
neering led to a job with Kodak’s Apparatus Division research
lab where, a few months into his employment, his supervisor ap-
proached him with a ‘small’ request. Fairchild Semiconductor
rotmanmagazine.ca / 39
 By the time Kodak realized its error, it was unable
to keep pace with the digitalization of the industry.
had just invented the first ‘charge-coupled device’ (CCD) — an
easy way to move an electronic charge around a transistor — and
Kodak needed to know if these devices could be used for imaging.
Could they ever. By 1975, working with a small team of tech-
nicians, Sasson used CCDs to create the world’s first digital-still
camera and digital recording device. Looking, as Fast Company
once explained, “like a ’70s Polaroid crossed with a Speak-
and-Spell,” the camera was the size of a toaster, weighed in at
8.5 pounds, had a resolution of 0.01 megapixel, and took up to
30 black-and-white digital images — a number chosen because
it was in alignment with the exposures available in Kodak’s roll
film. It also stored shots on the only permanent storage device
available back then — a cassette tape. Still, it was an astounding
achievement.
“When you demonstrate such a system,” Sasson later said,
“that is, taking pictures without film and showing them on an
electronic screen, inside a company like Kodak in 1976, you have
to get ready for a lot of questions. I thought people would ask
about the technology: How’d you make that work? But I didn’t get
any of that. Instead, they asked me, Why would anybody want to
look at their pictures on an electronic screen?”
In 1996, 20 years after this meeting took place, Kodak had
140,000 employees and a $28 billion market cap. Effectively a
category monopoly, in the U.S. it controlled 90 per cent of the
film market and 85 per cent of the camera market. But it had for-
gotten its purpose: Kodak had started out in the chemistry and
paper goods business, but it came to dominance by being in the
convenience business. What exactly was Kodak making more con-
venient? Photography was simply the medium of expression;
what was being expressed was ‘the Kodak Moment’ — our desire
to document and share our lives. Kodak was in the business of
recording memories. And what made recording memories more
convenient than a digital camera?
That wasn’t how the Kodak Corporation of the late 20th cen-
tury saw it. They thought that the digital camera would undercut
their chemical and photographic paper businesses, essentially
forcing the company into competing against itself; so they buried
the technology. Nor did the executives understand how a low-
resolution 0.01 megapixel image camera could hop on an ex-
ponential growth curve and eventually provide high-resolution
images. So they ignored it. Instead of using their weighty position
40 / Rotman Management Fall 2016
to corner the market, they were soon cornered by that market.
Back in 1976, when Sasson first demonstrated the digital
camera, frightened executives wanted to know how long it would
be until this new invention posed a serious threat to Kodak’s mar-
ket dominance. Fifteen-to-20 years, Sasson told them. In arriving
at this answer, Sasson estimated the number of megapixels that
would satisfy an average consumer at two million. Then, in order
to figure out the time it would take for two million megapixels to
become commercially available, he relied on Moore’s Law for his
calculation — and that’s where the trouble started.
In 1965, Intel founder Gordon Moore noticed that the
number of integrated circuits on a transistor had been doubling
every 12 to 24 months. The trend had been going on for about a
decade and, Moore predicted, would probably last for another
decade. About this last part, he was off by a bit: Moore’s Law has
held steady for nearly 60 years. This relentless progress in price
and performance is the reason the smartphone in your pocket
is a thousand times faster and a million times cheaper than a
supercomputer from the 1970s.
This is exponential growth in action. Unlike the +1 progres-
sion of linear growth — whereby 1 becomes 2 becomes 3 and so
forth — exponential growth is a compound doubling: 1 becomes
2 becomes 4 becomes 8, and so on. This doubling is unusually
deceptive. If you take 30 large linear steps (say three feet, or
one meter per step) from your living room, you end up 30 me-
ters away, or roughly across the street. If, alternatively, you take
30 exponential steps from the same starting point, you end up
a billion meters away, or orbiting the Earth 26 times. This was
precisely where Kodak went wrong: they underestimated the
power of exponentials.
The Six Ds of Exponentials
We hominids evolved in a world that was local and linear. Every-
thing in our forebears’ lives was usually within a day’s walk. If
something happened on the other side of the planet, they knew
nothing about it. Life was also linear, meaning nothing much
changed over centuries, or even millennia.
In stark contrast, today we live in a world that is global and
exponential. The problem is that our brains — and thus our
perceptual capabilities — were never designed to process at
either this scale or this speed. Our linear mind literally cannot
grasp exponential progression.
However, if the goal is to avoid Kodak’s errors (if you’re a
company) or to exploit its errors (if you’re an entrepreneur), then
you need to have a better understanding of how this change
unfolds — and that means understanding the hallmark charac-
teristics of exponentials. To teach these, we have developed a
framework called the Six Ds of Exponentials. Let’s follow the
chain reaction.
DIGITALIZATION. Innovation occurs as humans share and exchange
ideas. I build on your idea; you build on mine. This type of ex-
change was slow in the early days of our species (when all we had
as a means of transmission was storytelling around the camp-
fire), picked up with the printing press, then exploded with the
digital representation, storage and exchange of ideas made pos-
sible by computers. Anything that could be digitized — i.e., rep-
resented by ones and zeros — could spread at the speed of light
and became free to reproduce and share. Moreover, this spread-
ing followed a consistent pattern: an exponential growth curve.
In Kodak’s case, once the memory business went from a physical
process (that is to say, imaged on film, stored on paper) to a digi-
tal process (imaged and stored as ones and zeros), its growth rate
became entirely predictable: it was now on an exponential curve.
Of course, it’s not just Kodak. Anything that becomes digi-
tized hops on Moore’s Law of increasing computational power.
And once a process or product transitions from physical to digi-
tal, it becomes exponentially empowered.
DECEPTION. What follows digitalization is deception, a period
during which exponential growth goes mostly unnoticed. This
happens because the doubling of small numbers often produc-
es results so minuscule they are often mistaken for the plod-
der’s progress of linear growth. Imagine Kodak’s first digital
camera with 0.01 megapixels doubling to 0.02, 0.02 to 0.04,
0.04 to 0.08. To the casual observer, these numbers all look
like zeros; yet big change is on the horizon. Once these dou-
blings break the whole-number barrier (become 1, 2, 4, 8, etc.),
they are only 20 doublings away from a million-fold improve-
ment, and only 30 doublings from a billion-fold improvement.
It is at this stage that exponential growth, initially deceptive,
becomes visibly disruptive.
DISRUPTION. In simple terms, a disruptive technology is any inno-
vation that creates a new market and disrupts an existing one. Un-
fortunately, as disruption always follows deception, the original
technological threat often seems laughably insignificant. Take
the first digital camera. Kodak took great pride in things like con-
venience and image fidelity, and neither were present in Sasson’s
original offering. His camera took 23 seconds to snap and store
a 0.01 megapixel, black-and-white photograph. No threat there.
In the eyes of the Kodak brass, Sasson’s innovation would re-
main more toy than tool for many years to come. With their focus
on the quarterly profits of their chemicals and paper business,
they didn’t understand the disruption soon to be wrought by ex-
ponentials. If Kodak executives had done the math, they would
have realized that the desire to not compete against themselves
was actually a decision to put themselves out of business.
By the time Kodak realized its error, it was unable to keep
pace with the digitalization of the industry: it began to struggle
in the 1990s and stopped turning a profit by 2007, then filed for
Chapter 11 in January of 2012. Because it forgot its mission and
failed to do the math, a gargantuan 100-plus-year-old industry
leader foundered and became yet another cautionary tale about
the disruptive nature of exponential growth.
The fact is, we live in an exponential era, and this kind of
disruption is a constant. For anyone running a business — and
this goes for both start-ups and legacy companies — the options
are few: either disrupt yourself or be disrupted by someone else.
DEMONETIZATION. This means the removal of money from the
equation. Consider Kodak. Its legacy business evaporated
when people stopped buying film. Who needs film when there
are megapixels? Suddenly one of Kodak’s once-unassailable
revenue streams came free of charge with any digital camera.
In one sense, this transformation is the downstream version of
what former Wired editor-in-chief Chris Anderson meant in
his book Free. In it, he argues that in today’s economy, one of
the easiest ways to make money is to give stuff away. Here’s how
he explains it:
I’m typing these words on a $250 ‘netbook’ computer, which
is the fastest growing new category of laptop. The operating
system happens to be a version of free Linux, although it
doesn’t matter since I don’t run any programs but the free
rotmanmagazine.ca / 41
 For anyone running a business, the options are few:
either disrupt yourself or be disrupted by someone else.
Firefox Web browser. I’m not using Microsoft Word, but
rather free Google Docs, which has the advantage of mak-
ing drafts available to me wherever I am, and I don’t have
to worry about backing them up, since Google takes care
of that for me. Everything else I do on this computer is
free, from my email to my Twitter feeds. Even the wireless
access is free, thanks to the coffee shop I’m sitting in.
And yet Google is one of the most profitable companies in Amer-
ica; the Linux ecosystem is a $30 billion industry; and the coffee
shop seems to be selling $3 lattes as fast as they can make them.
Billions and billions in goods and services, as Anderson pointed
out, are now changing hands sans cost. Now, sure, there is loss-
leader free — as with Google’s giving away their browser but mak-
ing a killing off the information they gather along the way — and
there are open-source efforts like Wikipedia, Linux and the rest,
which are actually free. Either way, it’s a shadow economy, hap-
pening in plain sight.
At the time Anderson wrote Free, beyond a few extremely
obscure papers, economists had not studied the idea of free in
the marketplace. It was a blank spot on the map. In other words,
even people who make their living studying economic trends
were fooled. Once demonetization arrived, they didn’t know
what hit them.
Nor is it just economists or, for that matter, Kodak execu-
tives. Skype demonetized long-distance telephony; Craigslist
demonetized classified advertising; Napster demonetized the
music industry. The list goes on and on. And because demon-
etization is also deceptive, almost no one within those industries
was prepared for such radical change.
DEMATERIALIZATION. While demonetization describes the van-
ishing of money paid for goods and services, dematerialization
is about the vanishing of the goods and services themselves.
In Kodak’s case, its woes didn’t end with the vanishing of film.
Following the invention of the digital camera came the inven-
tion of the smartphone — which soon came standard with a
high-quality, multi-megapixel camera. Poof ! Now you see it;
now you don’t.
Once those smartphones hit the market, the digital cam-
era itself dematerialized. Not only did it come free with most
42 / Rotman Management Fall 2016
phones, consumers expected it to come free with most phones.
In 1976, Kodak controlled 85 per cent of the camera business. By
2008 — one year after the introduction of the first iPhone — that
market no longer existed.
What makes this story even stranger is that Kodak knew
this change was coming. Moore’s Law was well established by
that point, already driving the ceaseless expansion of memory
storage capacity, the process that would lead to the demon-
etization of photography. Kodak’s engineers surely knew this.
They arguably also knew about Hendy’s Law — coined by Kodak
Australia employee Barry Hendy — which states that the num-
ber of pixels per dollar found in digital cameras doubles every
year. The writing wasn’t just on the wall for Kodak — they had
put it there themselves. Yet Kodak still failed to stay ahead of
this curve.
Just think of all the 1980s luxury technologies that have de-
materialized and now come standard with your average smart-
phone: an HD video camera, two-way video conferencing (via
Skype), GPS, libraries of books, your record collection, a flash-
light, an EKG, a full video- game arcade, a tape recorder, maps,
a calculator, a clock — just to name a few. Thirty years ago the
devices in this collection would have cost thousands of dollars;
today they come free or as apps on your phone.
DEMOCRATIZATION. Obviously, this chain of vanishing returns has
to end somewhere. Sure, film and cameras now come free with
smartphones, but there are still the hard costs of the phone with
which to contend. Democratization is what happens when those
hard costs drop so low that they become available and affordable
to just about everyone.
To put this in perspective, let’s return to Kodak. The com-
pany didn’t just make money selling cameras and film, it also de-
veloped the film, manufactured the paper the photographs were
printed on, and manufactured the chemicals used to develop
that film. Why was this such a good business? First, when you
snapped your photos, you had no idea which of them would actu-
ally turn out to be any good, so you had to print them all. Even if
nothing was in focus, you still paid. Second, snapping photos was
only part of the fun; printing extra copies and sharing them was
the real treat.
Two decades back, the only people who could snap and
share at will were those wealthy enough to afford the consider-
able paper, printing and processing costs associated with several
thousand photographs. But with the digital camera, you gained
the benefit of knowing in advance which shots were actually
worth printing, and with the creation of photo-sharing websites
like Flickr, you could avoid printing altogether. The sharing of
images became free, fast — and completely democratized.
The New Kodak Moment
Many legacy institutions (like Kodak) were once able to make a
great living resting on their laurels. But 10 years from now, ac-
cording to research done at the Babson School of Business, more
than 40 per cent of today’s top companies will no longer exist.
In his book Exponential Organizations, Yahoo’s former head
of innovation Salim Ismail defines an exponential organization as
one whose impact (or output) — because of its use of networks
or automation and/or its leveraging of the crowd — is dispropor-
tionally large compared to its number of employees. A linear or-
ganization — like Kodak — is the opposite: lots of employees and
lots of physical processes and facilities. For all of the 20th century,
exponential organizations did not exist and linear companies
were protected from upstart intruders by their sheer size. Those
days are gone.
In October 2010, a couple of young Stanford grads, Kevin
Systrom and Mike Krieger, founded an exponential organiza-
tion called Instagram. Wired magazine described it as a “Shi-
va-the-destroyer application posing as a hipster hobby.” And
what was that hobby exactly? The next step in George Eastman’s
vision of making photography — to borrow the phrase — ‘as
convenient as a pencil’. Combined with the explosion of high-
resolution multi-megapixel smartphone cameras, this renegade
start-up completely demonetized, dematerialized and democ-
ratized the capturing and sharing of photographic memories.
Sixteen months after its founding, Instagram was valued at
$25 million.
In April 2012, Instagram for Android was released. Down-
loaded more than a million times in one day, it was the killer app
for the already killer company. Instagram’s value shot up to $500
million. Enter Facebook — which is also in the life-sharing and
documenting business; and they did the math. Instagram was
growing exponentially. With nearly 30 million users, it had be-
come the photo-sharing service, with a very powerful social net-
work to boot. Facebook didn’t want the competition, and they
didn’t want to play catch-up. Thus, on April 9, 2012, just three
months after Kodak filed for bankruptcy, Instagram and its 13
employees were bought by Facebook, for $1 billion.
How did Kodak fail to take advantage of the most important
photographic technology since roll film and end up in bankruptcy
court? Simultaneously, how did a handful of Silicon Valley entre-
preneurs go from start-up to a billion-dollar buyout in 18 months,
with just over a dozen employees? Simple: Instagram was an ex-
ponential organization.
In closing
In times of dramatic change, the large and slow cannot compete
with the small and nimble. But being small and nimble requires a
whole lot more than just understanding exponentials. You’ll also
need to understand the technologies and tools driving change,
which include exponential technologies like infinite computing,
3D printing, artificial intelligence, robotics and synthetic biol-
ogy, and exponential organizational tools such as crowdfunding,
crowd-sourcing and incentive competitions. These exponential
advantages are empowering entrepreneurs like never before.
Welcome to the age of exponentials.
Peter Diamandis is CEO of the X Prize
Foundation (xprize.org) and executive chair-
man of Singularity University. The founder of
more than 15 high-tech companies, he is the
co-author of Bold: How to Go Big, Create Wealth
and Impact the World (Simon & Schuster, 2015). Co-author Steven Kotler is
the co-founder and director of research for the Flow Genome Project (flow-
genomeproject.com). This article was adapted from their book. Copyright
2015 by PHD Ventures. Reprinted by permission of Simon & Schuster, Inc.
rotmanmagazine.ca / 43
Leadership Forum:
Embracing Machine
Learning
The Rotman School’s Creative Destruction Lab recently hosted
Machine Learning and The Market for Intelligence, a conference
exploring how advances in the application of machine learning
are creating and shaping new markets for intelligence. Following
are some highlights from the day’s presenters.
Compiled by Karen Christensen

Shivon Zilis
Venture Capitalist,
Bloomberg Beta
[a $75 million early-stage venture capital
fund backed by Bloomberg L.P.]

THE WORLD OF WORK is transforming at an unprecedented rate,

and a large part of that is due to advances in data and machine
intelligence. We take a lot of our inspiration from Bloomberg,
the LP in our fund, as it was one of the first products to harness
vast amounts of data and make insights immediately usable in a
business context. Bloomberg is also a great template for startups:
it has achieved global scale; it has a strong and open culture that
embraces technology; and it has been led by its founders for
decades. Bloomberg was created 30 years ago on a then-con-
troversial idea: that information in financial markets should be
more transparent and widely available. It also created the first
Illustrations by Cheryl Chalmers

professional social network.

My team and I invest in startups that are doing inspiring
things in the realm of machine intelligence and enterprise tech-
nology. One way to think of our focus is, we look at ‘the world of
work’; so, for example, we wouldn’t invest in a video game or e-
commerce site. Spotting early signs of an outlier is very difficult.

44 / Rotman Management Fall 2016

SHIVON ZILIS, CONT’D
Our approach is to look for signs that a startup has a chance to
be extraordinary. There might be certain qualities of the found-
ing team, or an amazing early prototype. We ask things like, Do
early users love this product so much that they spontaneously tell
others to use it? Are customers willing to pay full-price immedi-
ately? Are they potential ‘evangelists’? We also look for an exclu-
sive path to customers and good timing — whereby The Moment
is clearly now. If someone else has already tried to do it, that’s a
good sign, as is having a very clear initial target market. Some-
times the target market is surprisingly narrow, but has a high de-
gree of influence. Could this be the most important product to its
users? If so, we are interested.
My days probably look a lot like those of other venture capi-
talists. I often take 10 to 15 meetings per day. A couple of years
ago, I became overwhelmed; I was trying to do too much. But I
noticed that, over time, things got easier — and I realized that
was because of the machine intelligence tools I was using. They
helped me with everything from research, to scheduling meet-
ings, to recruiting. I said to myself, wait a minute, if I — as an in-
dividual knowledge worker — can’t survive without these tools,
what is happening in the economy as a whole? That’s when I de-
cided to focus my efforts exclusively on machine intelligence and
understand anything and everything that was happening there.
That led me to build a taxonomy of all the various tools out there,
by industry. Basically, it shows everything that is happening in
machine intelligence today (see page 46). Behind the scenes
right now, there are 2,500 startups jockeying for space. These
aren’t ‘promises for the future’: this is technology that is being
applied right now. Yes, this is a very nascent industry, but it has
begun to transform all walks of life.
We’re lucky to be working with founders who are creating
the changes we want to see in the world. From using new sen-
sors that enable farmers to use less water to get larger crop yields
(Tule Technologies, a Bay-area based company) to deep learn-
ing for early disease detection (Deep Genomics, a Toronto-
based company) we’re constantly inspired by what companies in
the portfolio are bringing to the world.
Canadian-born Shivon Zilis is a Partner at Bloomberg Beta. an early stage San
Francisco Bay-area venture capital fund that invests in companies transform-
ing the future of work. She is “obsessed with machine intelligence for good.”

Mike Del Balso (U of T BASc ‘12)

Head of Machine Learning
Implementation, Uber

AT UBER, MY TEAM IS TRYING to bring machine learning and intel-

ligent machines to every aspect of decision-making for the com-
pany. Right now, users open the Uber App and press ‘request a
ride’; they indicate where they are, type in the destination, and
a car comes to pick them up. They don’t have to provide a tip —
payment is made automatically, behind the scenes.
Let’s zoom in on just one of these steps, to see how machine
learning could help: when you’re entering your destination, you
have to type in an address. We all know that typing on mobile
phones really sucks: it’s very slow, and people often make mis-
takes. But this is critical data to get right. So, we built a model that
predicts your destination. In the address bar, as you begin to type,
a list of likely locations shows up, based on where you are located
now. Perhaps you want to go to the nearby grocery store? If so,
just tap on that, and your destination is selected. This small step
greatly reduces errors and makes transactions a lot faster. This is
CONTINUED ON PAGE 47

rotmanmagazine.ca / 45
 Machine Intelligence Landscape 2016: Compiled by Shivon Zilis
Agents Autonomous Systems
Professional Personal OS Interfaces Air Ground Sea Industrial
Howdy Facebook Siri 3DR Google Liquid Robotics Kiva Systems
Kasisto Large Maluuba Vertical Tesla Bluefin Data Harvest Automation
Overlap.cc Assistant.ai Cognea Airdog Mobileye Open ROV Avidbots
Clara Awesome Cortana Skydio Comma BluHaptics Rethink Robotics
x.ai Xiaoice VIV DJI Uber Fetch Robotics
Digital Genius Fusemachines Api.ai Project Loon Google Cruise Clearpath
Meekan Nestor Google Now Drone Deploy AdasWorks Energrid
Primer Technologies Toy Talk Skycatch Grey Orange
Magic Airware Osaro
Lily

Enterprise
Security/Fraud HR/Recruiting Sales Marketing Customer Support Internal Intel Market Intel
Sentinel Textio 6 Sense Liftigniter Clarabridge Alation Quid
Bitsight Spring Role Preact Radius Quantifind Palantir Data Fox
Drawbridge Unitive Vidora Bright Funnel Loop Ai Labs Skipflag Premise
Cylance HiQ Salespredict Retention Science Digital Genius Digital Reasoning Mattermark
Graphistry Gild Infer Air PR Wise.io Adatao Bottlenose
Feedzai Entelo Prism Action IQ Sapho Enigma
Area 1 Gigster People Pattern Framed Lucid CB Insights
Sift Science Aviso Rainbird
Brighterion Sentient Narrative Science
Gainsight

Platforms
Research/AGI Full Stack Machine Learning Industrial IOT Audio Vision Data Enrichment
Vicarious Context Relevant Rapid Miner Thing Worx Gridspace Orbital Insight Diffbot
Google Deep Mind Cognitive Scale Ayasdi Imubit Nexidia Descartes Labs Trifacta
Nnaisense Nvidia Amazon Web Alluvium Nuance Cortica Crowd Flower
SI Scaled Inference Qualcomm Services Planet OS Pop Up Archive Meta Mind Work Fusion
Geometric Teradeep Nara Logics Uptake Talk IQ Dextro Paxata
Intelligence Nervana Systems Big Ml Preferred Networks Vocal IQ Clarifai Idibon
Cortical.io Xively Expect Labs Planet Labs
Azure Machine
Learning
Blue Yonder
Skytree

Industries
Adtech Agriculture For Good Retail Finance Legal Materials & MFG Healthcare
Adtheorent Blue River Conservation In Venture Everlaw Zymergen Deep Genomics
Beyond Verbal Terr Avion Metrics Earnest Legal Robot Ginkgo Bioworks Enlitic
Meta Markets The Climate Data Kind Lendo Beagle Itrine Technologies Atomwise
Rocket Fuel Corporation Thorn Affirm Lex Machina Augmate Metabiota
Distillery Tule Bayes Impact Mirador Ravel Sight Machine Google Life
Tapad Mavrx Data Pop Zest Finance Seal Calculario Sciences
Affectiva Ceres Technologies Lend Up Ross Eigen Innovations 3 Scan
Honey Comb Calico
Butterfly Network Inc.
Recombine
Grand Rounds
IBM Watson Health

Industries (cont’d) Tech User Tools

Education Transport & Logistics Investment Finance Data Science Machine Learning Open Source
Knewton Nauto Bloomberg Domino Cortanta Analytics Skymind
Coursera Preteckt Quantopian Sentenai IBM Watson Platform DL4J
Gradescope Clearmetal Dataminr Yseop Hyper Science Microsoft DMTK
Khan Academy Taleris Isentium Yhat Oxdata H20 Spacy
Turn It In Alphasense Kaggle Alchemy API Caffe
Udacity Kensho Sense Anodot SciKit
Neurensic Outlier Fuzzy.io Tensor Flow
Data Robot Spark Beyond Theano
Glow Fi.sh Spark MLlib
Monkey Learn CGT
Sigopt
Indico

46 / Rotman Management Fall 2016

MIKE DEL BALSO, CONT’D
just one small example of how machine learning can help users.
are implications for big issues like traffic congestion and pollu-
If we can link together multiple similar improvements, we can
tion. Machine learning can also help with recommending the
make the difference between a confusing user experience and a
best route for a driver to take, where he will be most likely to
really great one.
pick up the most customers. And if machine learning can help
Looking ahead, we’re also thinking about bigger issues.
us understand who the best drivers are, then we can proactively
Consider this: there are a billion cars on the road right now, and
choose only the safest drivers to put on the road. This would
96 per cent of them are not being used at any given moment. A
help general road safety, and the safety of transportation, over-
large portion of city land — 15 per cent — is being used to store
all. All of this feeds into the future vision that Uber is trying to
these vehicles, in garages and parking lots. Imagine that when
achieve: ‘a smarter transportation network’. It’s all about mak-
your Uber comes to pick you up, there is another passenger in
ing transportation more affordable, reliable and safe. Machine
the car already. She is going to the same destination as you, or
learning is one of the core technologies that we will use to make
somewhere close. You get in, and on the way, maybe someone
this a reality.
else is picked up. If we can efficiently chain similar trips together,
we can reach a scale where — from the driver’s perspective, there
will always be someone in their car. This would enable us to push
prices down very low — to the point where it challenges the very
idea of car ownership.
Mike Del Balso (UofT BASc ’12) is Head of Machine Learning Implemen-
We believe this could be a game changer. Just think of what tation at Uber, based in the San Francisco Bay area. Previously, he was a
it would do for the number of cars on the road. Obviously, there Product Manager at Google.

Nick Adams
Managing Director,
AME Cloud Ventures

BIG DATA IS FORECAST to be a US$ 24 billion industry by next year,

and most of that data will come from machine learning. When we
are considering whether or not to invest in a company, the first
thing we look for is unique data sets. We love technology-heavy
companies that gather or create unique data at every stage —
from infrastructure all the way to applications, mobile and sen-
sors. Ultimately, what data does a company have that is unique
and differentiated? That is really important to us. Our next ques-
tions are, What problem is the company trying to solve? What is
the business they are trying to disrupt? What is the business mod-
el, and how is it differentiated? Are they going to try to compete
with existing enterprise IT vendors, and help them do something
better that they are already doing? Or, are they going to take on
an entire industry — like insurance, healthcare or education —
and use machine learning as an ingredient to disrupt that? These
are the lenses we use.
I’ll give you an example of a company we are excited about,
which has not publically launched yet. This startup is planning to

rotmanmagazine.ca / 47
NICK ADAMS, CONT’D
take on large companies in the security space. By using ‘sensor
fusion’, it has developed an algorithm that can accurately detect
when a person is in a particular building or location who should
not be there. The reason this is so exciting is that over time, they
will be gathering unique data. And importantly, they’re taking
on an existing industry by owning the relationship with the
customer, and we like that, too.
Very early in their business journey, entrepreneurs have to
figure out whether they are going to try to sell a service to another
business, or own the relationship with the end consumer. In most
cases, companies that want to revolutionize an industry need to
own that relationship.
Nick Adams is Managing Director of AME Cloud Ventures, based in Palo Alto,
California. He spent five years in India and China, becoming fluent in Manda-
rin and taking on key roles in building three Web, Software and IT businesses.

Jerry Kaplan
Fellow and Visiting Lecturer,
Dept. of Computer Science,
Stanford University

THE MOST IMPORTANT THING to recognize with respect to Artificial

Intelligence is that it is a technology, not a market. You can’t ‘sell
AI’ (at least, not to consumers); it has to be appropriately incorpo-
rated into products and services. With the recent progress in ma-
chine learning, the most productive places to apply it are to any
industry or problem for which there is a lot of data available, but
not in a standardized form. AI works best on well-defined prob-
lems where success or failure are easy to measure objectively.
I’ve spent most of my career using AI technology to build
real products for real customers. Over time, I could not help but
notice a widespread mythology: that we are building increas-
ingly-intelligent machines that may ultimately surpass human
capabilities — and wreak havoc. In my view, this narrative is mis-
guided and counterproductive. A more appropriate framing is
that AI is simply a natural extension of our long-standing efforts
to automate tasks — which date back to at least the start of the
industrial revolution. stead, what the new technology does is, it hollows out and chang-
To state the obvious, machines are not people, and there is es the jobs that people perform. Even experts spend most of
simply no persuasive evidence that they are on the path to be- their time doing mundane repetitive tasks, like reviewing lab test
coming ‘generally intelligent’ — despite what we see in the mov- results, drafting simple contracts, filling out paperwork, etc. If
ies. ‘Artificial general intelligence’, at least so far, is really little your job involves a narrow, well-defined set of tasks — and many
more than a pipe dream. ‘Wait a minute’, you might say: ‘doesn’t do — then indeed, your employment is at risk. But if you have a
the new wave of AI technology solve all sorts of complex reason- broader set of responsibilities or, importantly, if your job requires
ing and perception problems?’ Sure — it can perform some tasks a human touch — expressing sympathy or providing companion-
that people solve using human intelligence; but that doesn’t ship — I really don’t think you have much to worry about.
mean machines are intelligent. It merely means that many tasks
that we thought required general intelligence are, in fact, subject
to solution by much more narrow and mechanical means. Jerry Kaplan is a renowned serial entrepreneur, inventor, scientist, and
Robots aren’t coming to take our jobs. They’re coming — but author. He is currently a Fellow at the Stanford Center for Legal Informatics
and teaches Philosophy, Ethics, and Impact of Artificial Intelligence in the
not exactly for our jobs. Machines and computers don’t perform Computer Science Department at Stanford University. His most recent book
jobs: what they do is, they automate tasks. Except in extreme cas- is, Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial
es, you won’t roll in a robot and show an employee to the door. In- Intelligence (Yale University Press, 2015.)

48 / Rotman Management Fall 2016

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rotmanmagazine.ca / 49
 CREATIVITY,
CLUSTERS—
and Why Your Barista Has Mixed
Feelings About You

To prosper in the global economy, every region and industry

must boost the creative content of all types of work.
by Roger Martin, Richard Florida and Melissa Pogue

IN A MORNING RITUAL cemented in the American zeitgeist, four mil-
lion Americans get their cup of coffee at Starbucks. But among
those who receive their morning pick-me-up every day, do any
stop to ask the question, ‘Who serves the barista?’
Certainly, the barista seems to be paying attention. And for
what seems like the first time in a long while, an influential po-
litical candidate has paid attention, too. Mirroring the growing
number of news stories highlighting America’s growing inequal-
ity, Bernie Sanders’ popularity remained steadfastly throughout
the entire Democratic Party primary season in the face of the
‘establishment candidacy’ of Hillary Clinton. Despite low un-
employment, low interest rates, and high per capita productivity,
everyday people in cities all over the U.S. dramatically protested
an unjust system.
To understand the current malcontent among baristas —
and much of the U.S. electorate — we must first describe two el-
ements of work: industries and occupations. In doing so, we will
explore the intersection of these two elements and the patterns
that develop. What quickly emerges is a model of discrete win-
ners and losers in the modern economy.
Industries vs. Occupations
To begin, it is important to understand the difference between
industries and occupations. An occupation can be accomplished
in many industries, and an industry is composed of many occu-
pations. Accountancy is an occupation, but each industry, wheth-
er hospitality or manufacturing, needs accountants.
Industries differ in more ways than just the occupations that
comprise them. Harvard Business School Professor Michael
Porter played a pivotal role in the study of industries — which
led to the understanding that the co-location of firms can have
broader implications for the prosperity of regions. In his work on
competitiveness, he classified industries into two types: local in-
dustries and traded clusters.
The industries that form traded clusters produce goods and
services that flow across borders. The borders don’t need to be
national borders where the output is counted as international
trade; they could be as modest as a neighbouring town or re-
gion. The important part about traded clusters is that they are
formed by connected industries in close geographical proximity.
This web of firms, suppliers, academic institutions and local

rotmanmagazine.ca / 51
 Routine work remains the dominant form of employment in the U.S.
with more than 60 per cent of the wage-earning population.
government partners that support the cluster’s ability to add
value can develop a region to great heights and, in doing so, cre-
ate knowledge and technology ‘spillovers’ that generate higher
wages for their workers and provide greater levels of innovation
and entrepreneurship to the region.
Porter’s theory holds that traded clusters tend to attract spe-
cialized human resources to their region because the multiple
firms in the cluster provide a deep local labour market in the skill
sets sought by employers in that particular cluster. Roughly one-
third of employment is found in traded clusters.
On the other hand, local industries like your neighbourhood
coffee shop, gas station, or clothing retailer are those industries
that support the local area — whose goods and services generally
support all residents of the region and are found to be distributed
relatively equally within and across regions. While they make up
the bulk of employment in the U.S. at approximately two-thirds
of employment, they have lower wages, lower productivity, and
do not generate the spillovers created by traded clusters.
In his own research, one of the authors [Richard Florida]
studied the role played by occupations. Just as Porter found that
there were clusters of industries, Florida found that groups of
people or talent also congregated into groups characterized by
the creative-intensity of their work. ‘Creative Class’ workers, as
he calls them, are those that span science and technology, arts,
culture, business, management and the professions. Their jobs
require pattern recognition and field-specific information in or-
der to make independent judgment calls and decisions.
The number of workers defined as the Creative Class has
grown significantly over the last century, but it still makes up
less than 40 per cent of the wage-earning population. The other
workers — those who we characterize as having routine-intensive
jobs, are those who primarily carry out pre-determined com-
mands and undertake repetitive tasks within their jobs, with
little independent judgment required. An example of a ‘routine
worker’ might be a donut shop employee, assembly line worker,
or store clerk. Despite the recent revolution of automation, rou-
tine work remains the dominant form of employment in the U.S.
with more than 60 per cent of the wage-earning population.
Piecing the Puzzle Together
When you combine these two lenses on industries and occupa-
tions, you can divide the working population into four basic cat-
egories:
• Creative occupations in traded industries (‘creative-in-
traded’);
52 / Rotman Management Fall 2016
• Creative occupations in local industries (‘creative-in-local’);
• Routine occupations in traded industries (‘routine-in-
traded’); and
• Routine occupations in local industries (‘routine-in-local’).
Our recent analysis of these four employment categories
provides insight into the employment patterns and future pros-
pects of U.S. workers. First, traded clusters contain a larger share
of creative workers than local industries, with 46 per cent work-
ing in traded clusters versus 35 per cent in local industries. As
described above, traded clusters compete primarily on innova-
tion and creativity, so this is not unexpected.
Second, of the four categories, the creative-in-traded cat-
egory generates the highest average wages. These workers earn
on average $78,690, which is 31 per cent more than creative-in-
local workers ($59,990), 117 per cent more than routine-in-trad-
ed workers ($36,190) and 182 per cent more than routine-in-local
workers ($27,840). Those who earn by far the lowest average
wages (routine-in-local workers) also make up the largest cat-
egory. In addition, the best-off of the four groups, the creative-in-
traded workers, earns a 78.5 per cent premium on average wages,
but makes up the smallest share of workers.
These differentials have only worsened over time. While
the proportion of creative-in-traded workers has grown from 13.3
per cent in 2000 to 13.9 per cent in 2012 and continued to enjoy
a higher wage premium over the national average, routine-in-
local workers have increased by twice as much, from 43.5 to 44.8
per cent, and experienced wages that have fallen further relative
to the average. The exacerbation of inequality suggests that, if
anything, the gap between the more and less advantaged cat-
egories of workers is likely to continue to widen over time. This
observation lays the groundwork for the challenges faced by the
modern economy.
We recently used data from the American Community Sur-
vey to look at the patterns of employment for wage earners across
260 U.S. metro regions. When charted across metros, the distri-
bution of creative-in-traded workers becomes highly concentrat-
ed, uneven and spiky.
Pools of these workers clump together in particular met-
ros around the country, with the list of top cities reading like a
‘who’s who’ of leading knowledge and tech hubs: San Jose tops
the list with fully 33 per cent of the workers classified into the
creative-in-traded category. San Francisco, Boston, Raleigh and
Seattle follow shortly behind. At the short end of the stick are the
Sunbelt and Rustbelt centres; and El Centro, California has the
 Cities with higher intensity of creative-in-traded employment
also experience greater levels of income inequality.
lowest share of creative-in-traded employment with 3.9 per cent
of its working population.
It has been known for some time that having a greater per-
centage of workers in traded clusters is good for a region’s econo-
my along a number of dimensions; and having a greater percent-
age of creative workers has been shown to be similarly beneficial.
Both are positively correlated with key indicators of a city’s eco-
nomic performance, including wages, GDP per capita and inno-
vation measures like patent-output.
When using the combined approach, it’s not surprising that
the share of creative-in-traded jobs is strongly associated with
the same measures of regional economic performance. Con-
versely, the higher a region’s share of routine-in-traded and rou-
tine-in-local workers is negatively associated with performance
variables. So while it’s clear that the metros with higher creative-
in-traded employment also perform better overall on measures
of output, prosperity and innovation, the question remains as to
how these gains are distributed.
Who Serves the Barista?
It would be naïve to assume that the benefits of these creative-
in-traded workers simply trickle down to the other industries and
groups of workers. There is already one signal that this may not
be the case: the much higher wages and salaries commanded
by creative-in-traded workers suggest that they may be coming
away with a disproportionate share of these economic perfor-
mance gains.
When we looked at the connection between the share of
creative-in-traded employment and income inequality within
the region (measured by its Gini coefficient) the resulting cor-
relations confirmed our suspicion: metros with higher intensity
of creative-in-traded employment also experience greater lev-
els of income inequality. In other words, the overall gains from
creative-in-traded clustering are unevenly distributed between
metros.
Neither shares of creative-in-local nor routine-in-local em-
ployment were significantly correlated with income inequal-
ity. However, a higher share of routine-in-traded workers were
found to be negatively and significantly correlated with inequal-
ity. The problem, of course, is that these are exactly the kinds of
jobs that have been disappearing as a consequence of automa-
tion and globalization.
This suggests that in an economy where workers in creative-
in-traded categories power innovation and economic growth,
there are discrete winners and losers. To get at this, we looked
at the regional wages of each of the four employment catego-
ries when matched with that region’s share of creative-in-traded
workers. We wanted to see what happens to the wages of the four
groups if they live in an area dominated by creative-in-traded
employment.
As expected, we found that a higher share of creative-in-
traded workers tends to lift wages overall. But it turns out that is
the case for only three of the four major categories. So, it’s great
to be the creative-in-traded workers in San Jose who make, on
average, $117,630. But the same workers in El Centro — with its
tiny share of creative-in-traded work — only earn $48,450, on av-
erage. Other areas with higher creative-in-traded workers were
also associated with higher wages for the creative-in-local and
routine-and-traded workers. But there was no positive effect on
the wages for the routine-in-local workers who lived in a region
with high creative-in-traded employment.
That story would be mildly illuminating if we had stopped
there, since it shows that high shares of creative-in-traded
workers are associated with wage benefits to the majority of a
region’s workers, and to the group that doesn’t benefit, at least
they are not disadvantaged. Seems like a win-win. But we also
conducted the same analysis for wages in each category after
taking into consideration the median cost of housing in each
region. Unsurprisingly, areas with higher shares of knowledge
and creative workers experience higher housing costs. Think
about housing prices in areas like San Francisco or New York,
versus those in New Orleans or Oklahoma City. The presence
of knowledge-based and export-oriented wage earners—while
beneficial to the region in terms of higher productivity and
incomes with the metros — also tends to translate into higher
metro housing costs.
A higher share of creative-in-traded workers is still asso-
ciated with higher after-housing wages for the two groups of
creative workers — those in the creative-in-traded and cre-
ative-in-local categories: their wages rise enough, on average,
to more than cover the increased costs of housing associated
with living in a more expensive creative-in-traded intensive
metro.
But two groups of workers are not better off: routine workers
in traded clusters gain no benefits; and routine workers in local
industries are significantly worse off. The higher wages earned
by the routine workers in areas with greater shares of creative-
in-traded areas are not able to overcome the increased costs of
housing necessary to live and work in those areas. So in the case
of the routine-in-traded workers, they end up worse off. These
rotmanmagazine.ca / 53
 As housing costs rise, routine workers are shunted
off to less-expensive metros, which, by definition, have smaller
concentrations of creative-in-traded workers.
are the groups that account for the majority of all workers in the
U.S., and they are getting left behind.
The implications of this pattern are stark: they are associ-
ated with rising inequality and to the sorting and separation of
the new economy’s winners and losers. The higher wages offered
in metros with larger creative-in-traded employment create sub-
stantial incentives for more skilled and advantaged workers to
migrate to these metros. As housing costs rise, routine workers
— especially those in routine-in-local jobs — are shunted off to
less-expensive metros which, by definition, have smaller concen-
trations of creative-in-traded workers.
This creates a vicious cycle, where the advantaged get more
advantaged over time, while the disadvantaged sink further.
It also likely increases the commute times of routine-in-local
workers, who must live farther and farther away from metros
to afford housing and therefore fall outside of various networks
that are important for upward mobility. It also means that the
children of more advantaged categories of workers gain access
to many other advantages — like better schools, lower crime
rates, and better extra-curricular activities — compounding
their advantages over time. In this light, the Google bus protests
that began in the San Francisco area in 2013 are unsurprising:
providing services to local creatives that are not extended to
routine-in-local workers only adds insult to injury in an already
unfair situation.
It’s really no wonder that our barista isn’t happy: toiling away
at her coffee shop in New York City, she is doing her part to sup-
port the rising prosperity generated by the creative workers she
serves; but instead of receiving benefits from the increased local
activity around her, she is, in fact, put further behind at the end
of the day. Economically, she would be better off if she lived and
worked in Newark.
We know that creatives flock to areas filled with culture,
arts and knowledge networks. What creative-in-traded worker
wouldn’t prefer the amenities of New York City? But without the
barista and other routine-in-local workers, these things would
not exist. The fact is, the provision of goods and services to cre-
ative workers by local routine workers is a key part of what sus-
tains the model. So, how unfair is it that those who support the
creative workers are being left behind? Is there not an obligation
for employers to pay their workers the salary that lets them live
where they work, regardless of region? Is there not a debt owed
by the creative workers in all industries who reap the rewards
of co-location, but do so at the expense of those who support
54 / Rotman Management Fall 2016
them in the places they live and work?
The answers to these questions are not black and white. The
vast size of the routine-in-local workers as a share of U.S. em-
ployment makes this issue paramount (and further explains why
a 74-year-old Senator from Vermont became so popular), so our
analysis adds important context to the modern economic chal-
lenge for the U.S. economy.
The twofold effect of the growing size of routine-in-local
workers and the huge and growing wage premium of the cre-
ative-in-traded workers over the rest of the population are un-
doubtedly connected to the growing income inequality in the
U.S. Simply put, nearly half of the American workforce is stuck
in low and declining wage employment, nearly guaranteeing the
continued stagnation of earnings of the middle class.
Closing the Gap
The economic challenge is clear. While the proportion of cre-
ative jobs is inching upward slowly, it is occurring at a glacial
pace — on average at 1.4 per cent per year over the past half-
century. At the current rate, it will take another 25 years for there
to be as many creative jobs as routine jobs. In the meantime, the
income inequality related to the stagnation of routine-in-local
jobs, in particular, combined with the continued rise of the earn-
ings in creative-in-traded jobs, will tend to be accentuated.
To stem the tide of rising inequality, a transformation in how
work is structured and valued is necessary. The economy can’t
depend solely on the slow substitution of creative jobs for routine
jobs: the creative content of routine jobs needs to be enhanced.
Governments have contributed by increasing the supply of
workers capable of specialized creativity-intensive work through
a broadly available primary and secondary educational infra-
structure and an increasingly robust tertiary educational sector.
For the years 2010 to 2012, only 41 per cent of young Americans
aged 30-34 had completed tertiary education. Governments will
have to continue to expand the tertiary sector to ensure the sup-
ply of workers best suited for creativity-intensive work.
The deeper challenge is on the demand side, and it lies in
the hands of the business community. Business must lean into
the wind and provide opportunities for their employees to draw
on their full creative potential. To do so, it must create the envi-
ronments that add creativity — via independent judgment and
decision-making — to routine work.
Currently, there is a self-fulfilling prophecy in the routine
sector of the economy. If employers discourage or prohibit inde-
pendent judgment and decision-making, these jobs will become
and remain routine jobs. These low-paid, low-skill jobs will never
add to the bottom line and never attract the kind of applicant
who would have the skills to make it a more creative job, setting
in motion a vicious cycle.
If instead, employers purposefully create workplace envi-
ronments that promote employee judgment and decision-mak-
ing, these jobs can become more creativity-intensive. This, in
turn, can improve productivity and enable the employer to profit-
ably pay higher wages.
History shows that leading companies have won in their
industries in part by encouraging independent judgment and
decision-making from their routine employees. Toyota, which
rose from being a small Japanese player to become the most
successful automobile manufacturer in the world, did so by en-
couraging independent judgment and decision-making on the
plant floor. Every worker contributes to continuous improve-
ment and each has the authority to ‘pull the cord’ to shut down
the entire assembly line if she sees a quality problem that would
be better solved immediately than allowed to produce a num-
ber of flawed vehicles.
In the service sector, Four Seasons Hotels and Resorts
is the largest and, along many dimensions, the most successful
global luxury hotel chain. In an industry featuring low wages
and employee turnover of approximately 60 per cent a year,
Four Seasons has extremely loyal staff earning industry-leading
wages. The basis of its performance advantage is a belief that in
order to provide the best customer service in the industry, each
member of the hotel staff has to have the independent judgment
and decision-making authority to address the immediate needs
of the guest. Famously, Four Seasons has no customer service de-
partment: every single staff person — from managers to maids to
bellhops — is responsible for delivering the highest quality, cus-
tomized guest service.
Retailing is typically seen as the epicenter of low-paying,
dead-end routine jobs. But MIT professor and Martin Prosper-
ity Institute Fellow Zeynep Ton has shown how retailers like
convenience store QuikTrip, supermarkets Trader Joes and
Whole Foods, and home improvement chain Costco have
made it a central feature of their strategies to provide more in-
dependent judgement and decision making authority alongside
higher wages. The result is a virtuous circle of lower turnover,
higher sales, superior customer service, improved productivity,
and striking success.
The fact is, the creative intensity or routine intensity of a
given job is not pre-determined or fixed: it is constructed by the
employer in conjunction with the employee. If both conspire to
define it as involving minimal independent judgment and deci-
sion-making, it will remain a low-paid job, which will barely en-
able the worker to live in a prosperous city and will provide little
or no hope for the future for its holder and family.
If instead, employers encourage individuals to demonstrate
increasing levels of independent judgment and decision-making
in that job, the employer will be able to pay a higher wage for it,
and the employee will build up their creative skills. That, we be-
lieve, is the most productive way forward: the transformation of a
routine-intensive economy into a creativity-intensive one.
In closing
The creative intensity of the global economy has grown substan-
tially in recent years. However, these creative individuals are be-
ing propped up by a mass of hard-working routine workers who
are not participating in the economic upside. To prosper in the
global economy, every region and industry must boost the cre-
ative content of all types of work while continuing to encourage
and support the growth of creative jobs.
Roger Martin, C.M., is the
former Dean and current
Director of the Martin
Prosperity Institute at
the Rotman School of
Management. Richard Florida is Director of Cities at the Martin Prosperity
Institute, Director, Cities and University Professor at the University of
Toronto, Global Research Professor at New York University, and founder
of the Creative Class Group. Melissa Pogue is a research associate at the
Martin Prosperity Institute. This article is a summary of their recent paper,
“Creativity, Clusters and the Competitive Advantage of Cities”, which
was published in the Competitiveness Review.
Rotman faculty research is ranked #3 globally by the Financial Times.
rotmanmagazine.ca / 55
 THE
NETWORKED
ORGANIZATION:
HOW TO TURN
RELATIONSHIPS
INTO COMPETITIVE
ADVANTAGE
 We hear a lot about disruptive companies these days;
but we rarely hear about the shifts in relationship structures
that make the disruption possible.
by Charlie Brown

STORIES ABOUT MICROSOFT’S RECENT TURNAROUND often focus on
CEO Satya Nadella’s efforts to establish a new customer-ob-
sessed, data-driven culture within the company — and they’re
right. But that high-level view misses another, even more enlight-
ening story that took place behind the scenes, and with a lot more
participants.
With the release of Windows 10, Microsoft employed a net-
work strategy that took advantage of the enormous power of its
community — users and external developers, as well as its own
employees — to make its new operating system a rousing success.
The Windows Insider Program (WIP) was originally envi-
sioned by Windows Engineering as a way to solve the ‘scale prob-
lem’, by seeking telemetry and feedback from a large community
of beta-testers. Partway through the development of Windows
10, however, they decided to dream bigger. Through careful re-
design of the feedback and communication structures binding
them together, Microsoft was able to turn the WIP into some-
thing extraordinary: a fluid network of more than seven million
users, external developers, Microsoft product developers and
marketing teams, communicating across organizational bound-
aries, with a shared vision of what Windows 10 could be.
Never before had Microsoft — or any major software com-
pany — so blurred the lines between employees and users, and
the ensuing feedback and discussion had a profound effect on
the project. Not only is Windows 10 hands-down the best OS
in the company’s history, it also hit the ground with an unprec-
edented level of anticipation, and sales numbers to match. This
networked approach re-established Microsoft as an insightful,
forward-thinking company capable of surpassing user expecta-
tions and delivering moments of genuine delight.
The Power of Relationships
Even in our global, technology-fueled economy, the quality of
a firm’s relationships — with customers, employees and suppli-
ers — continues to be the single-best predictor of its long-term
success. Journalists love to write about companies that have dis-
rupted their category through an innovative approach to technol-
ogy or management; what they are less likely to talk about are the
shifts in relationship structures that make many of these trans-
formations possible in the first place.

rotmanmagazine.ca / 57
 By some metrics, Airbnb is now the largest hospitality brand in the world,
despite owning almost no property and being less than 10 years old.
The peer-to-peer or ‘sharing’ economy, for example, that
launched mighty upstarts like Airbnb and Uber, relies heav-
ily on the idea of democratized networks, which replaces the
hierarchy of the hotel booking system and the taxi queue with
direct connections between customer and vendor. Meanwhile,
the Open Source movement’s ethic of distributed workload and
free sharing departs sharply from the top-down way we man-
aged computer code in the ‘1980s, yet it has led to such pro-
foundly useful developments as the Linux operating system,
the Apache web server and the entire GitHub code communi-
ty. Open source also drives the growth of companies like Pup-
pet Labs, which has transformed the way businesses buy and
manage server capacity.
Meanwhile, the U.S. Army saw its greatest leap in effective-
ness since the 1990s not because of a new piece of hardware, but
a new set of policies pioneered by General Stanley McChrystal,
which empower greater decision-making among individual units
in the field. In each case, the highly visible improvement — a
new taxi model, smarter apps, more responsive soldiers — has
its roots in a deeper shift towards a networked structure. Simply
put, the functional innovation could not have occurred without
the relational one.
Networked organizations make a point of being more rela-
tional than transactional: they exchange work, time and money
in a way that feels like part of an ongoing back-and-forth, rather
than the finite settling of a bill. They also take a broader view of
relationships than is strictly necessary, reaching beyond office
walls when defining their organization.
For the purposes of this article, a ‘networked organization’
simply means a group of people working together towards a common
goal in a coordinated, decentralized fashion. Networked organi-
zations are characterized by distributed power structures and
broad access to information. They emphasize a direct commu-
nication style that encourages people with common issues to talk
with each other, rather than sending them up the chain of com-
mand. They also tend to prioritize support over control when deal-
ing with employee and customer needs.
If this model seems at odds with the traditional approach
still taught in most MBA programs, that’s because it wasn’t
formed in boardrooms or business schools, but among commu-
nity organizers. Social movements for civil rights, migrant labour
rights — and even some grassroots political organizations — have
58 / Rotman Management Fall 2016
used versions of this model for decades. It was eventually named,
described, and formalized in the 1980s by Marshall Ganz, who
went on to advise the 2008 Obama presidential campaign to ex-
traordinary effect.
One of Ganz’s key insights — which seems obvious in retro-
spect—is that volunteers knocking on doors aren’t going to get as
far delivering a pitch as they would by asking those who answer
the door about their needs, and establishing points of common-
ality before advocating for the cause. The broader idea behind
this model — that relationships are a resource to be nurtured and
invested in — makes immediate sense in an activist group, where
people are basically all you have; but as organizations from busi-
nesses to non-profits to militaries realize that people are their
greatest asset, the model begins to resonate well beyond that.
Who Should Adopt a Networked Structure?
Whether your organization should adopt a networked structure
depends partly on its purpose, but the answer is most likely Yes.
Networked organizations are more flexible in the face of shifting
market realities, and better able to take their most important re-
lationships with them when they undergo significant change —
like a rebrand or a new business strategy. They also have a big
marketing advantage over their more loosely-connected com-
petitors — which can transcend short-term publicity trends.
The most deeply-networked organizations — like Wikipe-
dia, eBay and Airbnb — soften the line between customers and
employees to offer a wide range of relationship options, from
‘strictly transactional’ to ‘enthusiastic participation’. This blur-
ring of roles also influences the organization on the inside, im-
proving employee retention by creating an environment where
open communication and personal agency are encouraged.
This approach isn’t for everyone: organizations that work
in deeply-commoditized markets — where product quality and
price trump everything else and brand loyalty is non-existent
— may not have as much use for networked relationships. But
even high-volume, overtly-transactional brands like Walmart
and Real Canadian Superstore have found themselves making
business decisions expressly in order to connect with consumers’
values. This is why Walmart is currently the world’s largest seller
of organic produce and Marine Stewardship Council-certified
seafood, even though these bring price premiums that may seem
at odds with Walmart’s image as a low-price leader.
 Human relationships within and around organizations are incredibly complex,
but the tactics that activate them are remarkably consistent.
The other key exceptions are companies so driven by their
original vision or their founder’s principles that they have no in-
terest in responding to the values of their network. Tesla is a good
example of this; Apple is not. Both brands are closely associated
with their founders, but Tesla (along with Elon Musk’s other
ventures) is primarily about realizing a specific vision of how the
world should work. It’s a powerful vision that has brought hun-
dreds of thousands of people into the fold, but Tesla does little to
encourage relationships among customers, or to foster ongoing
discussion between Tesla and its enthusiasts.
Apple, on the other hand, has always been a deeply respon-
sive company. Even though it famously ‘doesn’t do consumer re-
search’, it has transformed itself numerous times to address the
needs of technology users at exactly the right time, starting with
ease of interface (the Mac OS), then cross-platform and content
integration (iTunes + iPod), mobile computing (iPhone) and now
self-quantification (Apple Watch). Apple is able to do this, in part,
by actively supporting a network of users, developers and em-
ployees through its intensely-social retail stores and robust on-
line communities.
Being vision-led doesn’t have to mean ignoring relation-
ships. Outdoor apparel company Patagonia is closely linked to
its founder Yvon Chouinard, yet has done more to foster com-
munity than almost any other sports apparel brand. A recent
marketing campaign profiled longtime owners of Patagonia gear,
showing them wearing beat-up Patagonia jackets from the 1980s.
Individual Patagonia stores work overtime to engage with local
outdoors enthusiasts through volunteer opportunities, lectures
and hosted events. Chouinard long ago absented himself from
an executive role, but his influence is still evident. The result is
an unparalleled level of brand cachet and a customer base so in-
spired that they practically constitute their own Patagonia mar-
keting department.
Steps for Making the Transition
Human relationships within and around organizations are in-
credibly complex, but the tactics that activate them are remark-
ably consistent. In our experience, successful networked organi-
zations share three approaches.
1. THEY CREATE INCENTIVES FOR FORMING RELATIONSHIPS. When
you sign up to become an Airbnb user, the first thing you do
is create a profile that includes a photo, some personal back-
ground, a statement about your travel interests, and your
social media links. This is initially to verify your identity—a
critical part of the trust framework that makes it less daunt-
ing for strangers to let you into their homes. But the profile
is also the first step in a longer journey, towards advocacy or
hosting. Hosts and guests are encouraged to leave reviews
for each other, and Airbnb arranges regular get-togethers in
cities where their listings are abundant. If you decide to take
the plunge and start hosting, you’ll find a whole new level of
incentives designed to bind you more closely to the brand:
‘Superhost’ status badges for earning exceptional reviews,
invitations to local and international host-only events, even
the occasional well-curated gift bag left on your front porch.
Airbnb’s treatment of hosts exemplifies a three-pronged
approach to relationship incentives. The company provides
material rewards that are tailored to the individual (that gift
bag is a real thing, and includes personal touches like a jar
of earplugs if reviews indicate that the host has struggled
with noise issues). It offers official recognition in the form
of badges or titles. And it creates experiences, both to reward
hosts and to give them opportunities to form more relation-
ships. Any one incentive type could be dismissed as a simple
quirk of policy, but the combination of all three drives home
a powerful message: that relationships are valuable, no mat-
ter how you measure value. Internally, Airbnb takes a simi-
lar approach to encouraging relationship formation. Em-
ployees enjoy unique, customized perks, not just for posting
great numbers, but for having exceptional interactions with
guests, hosts — and one another.
2. THEY DEVELOP A SENSE OF SHARED PURPOSE, AND EVANGELIZE
IT THROUGHOUT THE ORGANIZATION. It’s surprising how many
otherwise thoughtful, forward-looking organizations we’ve
encountered that have never sat down and named their core
purpose, beyond ‘be financially successful’. Yet doing so is
the first, biggest step to getting employees aligned without
being excessively prescriptive. More than an internally-
defined vision, shared purpose is something that comes
from the entire community of employees, leaders and cus-
tomers, and transcends the current goals of your organi-
zation. Examples include a commitment to environmental
rotmanmagazine.ca / 59
 sustainability, or a belief that everyone deserves a bargain.
Once named, this core purpose should be clearly stated and
widely understood.
When purpose is shared, some difficult tasks become
much easier, because you’re tapping into existing desires
and behaviours. Shared purpose allows your organization
to leverage what is already happening instead of perpetu-
ating a ‘build it and they will come’ dream. For example,
moving decision-making down the chain of command is
a safer prospect when every employee is working from the
same set of motives as the executive suite. It also makes
employees more effective at communicating with cus-
tomers about new offerings or changes in policy, because
they all hold a common goal. The traditional approach to
a customer-facing policy shift is to hand employees some
version of a script or rulebook, and have them relay it accu-
rately to customers. This approach is precisely the source
of apathetic, non-responsive service. In a networked or-
ganization, the first step is to convince the employees of
the value of this new shift, then task them with convey-
ing the change to customers in a way that makes sense to
them. This is where genuine, loyalty-building interactions
originate.
Of all the habits of successful networked organizations,
shared purpose may be the hardest to get right, because it
requires consistency at the highest levels of management,
tempered by enough flexibility to avoid hardening into
dogma.
3. THEY TRUST THEIR EMPLOYEES. Online retailer Zappos may be
the best-known example of this approach, with legendary
customer service based largely on a policy of hiring only
engaged, enthusiastic employees, then giving them the
leeway to shine. Zappos makes a point of hiring for trust
rather than skills, under the assumption that the latter can
be taught, but the former is innate. In our experience, this
assumption is correct: new hires who genuinely share your
purpose and want to be actively trusted are the bedrock of
any networked organization.
The Challenges of Becoming More Networked
These tactics might seem intuitive, even easy, but for most or-
ganizations, they’re surprisingly difficult to implement. For one
60 / Rotman Management Fall 2016
thing, a networked organization needs dispersed leadership,
meaning that all employees have access to the executive staff
and other key decision makers. But this need often runs counter
to the habits of those who actually make the decisions. A typi-
cal corporate hierarchy with a long command chain turns the act
of disseminating organizational values into a game of Broken
Telephone.
Shifting your leadership structures, behaviour incentives
and communication patterns also demands a lot of your em-
ployees and other network members. These constructs aren’t
parts on a machine that can be swapped out to improve perfor-
mance. They’re learned behaviours that have arisen from hun-
dreds or thousands of hours on the job — and they’re part of
an existing shared culture that helps reduce the daily friction
among busy people. Asking everyone to change them, all at
once, is a big request.
Simply deciding to be more networked — to value relation-
ships more, and shift away from a transactional mindset — is
not enough. It’s a project: it requires a strategy and an execution
plan, with clearly defined roles and actions for the team that en-
sure its completion. A good place to start is with an honest self-
assessment. After working with dozens of organizations over
the past several years, we’ve found the answers to the following
six questions crucial in forming a network strategy; yet few
leaders have truly wrestled with them:
1. Who are the members of your community — not just em-
ployees and customers, but all the actors necessary for your
ongoing success?
2. What purpose do the members of that community share,
with or without your organization?
3. What role does your organization play in the pursuit of that
purpose? How could it play that role more effectively?
4. How does your organization reward the formation of rela-
tionships, not just transactions, among the members of its
community?
5. What structural shifts will you need to make in order to drive
long-term relationships, without sacrificing short-term
transactions?
 Hiring employees you’re likely to trust has no effect if you don’t provide
them with opportunities for creative, autonomous action.
6. How are you modeling the type of relationship-driven judg-
ment and leadership you want your employees to exhibit?
Networked Organizations in Practice
The examples used in this article are all unusual in some way:
some of them serve an especially willing customer base, of-
fer a unique product, or could find themselves vulnerable to a
lower-priced competitor or a shift in market preferences. But
think about what they’ve achieved: by some metrics, Airbnb is
now the largest hospitality brand in the world, despite owning
almost no property and being less than 10 years old; Wikipedia
is the most-utilized body of reference information in the world
by far, and among the most visited websites on earth; and Mi-
crosoft makes the world’s most successful operating systems
and productivity software, repeatedly defying its doomsayers.
A shift toward networked relationships played a starring
role in each of these success stories, and their products and
customers are as ecumenical as they come: practically every-
one, at some point, stays a night away from home, looks some-
thing up on the Internet, and uses a computer. This trend will
only accelerate in the coming years, as person-to-person con-
nectivity becomes second nature. This evolution has major
implications for any organization that relies on human relation-
ships to achieve its goals — which is to say, nearly all of them.
It demands significant transformations in communication,
power structures and incentives — but it also opens up some
remarkable opportunities.
For a major tech company, more networked interactions
could mean customers who are comfortable playing fluid roles
across numerous classifications. These fluid roles would allow
some customers to simply buy a piece of software and use it,
while others provide casual commentary on how to improve it,
and the most motivated contribute significantly to R&D efforts
by testing pre-market products, offering formal feedback, and
sharing the news with their network of peers.
For a small specialty manufacturer that depends on hard-
to-source materials, it could mean putting extra effort into
fostering conversations with suppliers and shipping partners.
While this effort might distract in the short term from compet-
ing priorities, like improving the user interface on the company
website, it can also lead to better (or even exclusive) access to
unique materials, enabling a small shop to defend its market
without having to scale up.
For an online retailer, it could mean employees who work
in small teams distributed around the world, requiring little di-
rect management because they are well-trained and well-versed
enough in the company’s values to make decisions on their own.
They work from an assumption of abundance: that building rela-
tionships with customers and each other is both a pleasure and
a responsibility, and that support is available when they need it
(but not when they don’t).
In closing
While it’s true that shifting an organization from a traditional hi-
erarchy to a responsive network is a project and requires a strat-
egy, it’s also an ongoing process. Creating incentives for relation-
ship formation only helps if you fulfill and celebrate them, month
after month and year after year. Hiring employees you’re likely
to trust has no effect if you don’t actually trust them and provide
them with opportunities for creative, autonomous action.
Ultimately, what’s called for is a different set of expecta-
tions from leadership, about the role relationships play in every-
day business and the value they create. Without buy-in at the
highest level, the most carefully-crafted network strategy will
lead to only temporary changes. With leadership support, you
can quite literally turn every person in your organization and
every person they interact with into an agent of change, growth
and success.
Charlie Brown is the CEO of Context Partners,
a Portland, Oregon-based firm that works across
sectors — from non-profits to the Fortune 500 — to
develop the relationships that change how we live,
work and engage with the world. His clients have
included Microsoft, Lilly and the Rockefeller Foundation.
rotmanmagazine.ca / 61
 Redesigning Work
in an Era of
Cognitive
Technologies
Cognitive technologies will change the employment landscape, leading
to the redesign of jobs and the introduction of new kinds of work.
by David Schatsky and Jeff Schwartz

RAPID PROGRESS IN THE FIELD of artificial intelligence (AI) has prov-
voked intense debate about the implications of this trend for
society. Some see a driver of economic growth and boundless
opportunities to improve living standards. Others see existential
threats ranging from killer robots to widespread technological
unemployment. Though we believe the worst of these fears are
overblown, cognitive technologies — the products of the field
of artificial intelligence (AI) — cannot be ignored. They are an
emerging source of competitive advantage for business and are
on their way to ubiquity at work and at home.
Artificial intelligence researchers have sought to develop
techniques to enable computers to perform a wide range of tasks
once thought to be solely the domain of humans, including play-
ing games, recognizing faces and speech, making decisions un-
der uncertainty, learning, and translating between languages.
We distinguish between the field of AI and the technologies that
emanate from the field, which we call ‘cognitive technologies’.
Commonly used cognitive technologies include machine learn-
ing, computer vision, speech recognition, natural language pro-
cessing and robotics.
Over the next three to five years, cognitive technologies
will likely have a profound impact on work, workers and orga-
nizations. These technologies can and will be used to eliminate
jobs; but they will also make it possible to redesign work, creat-
ing new opportunities for workers and greater value for busi-
nesses and their customers. In this article we will discuss the
automation choices ahead and describe the cost and value as-
sociated with each.
Conflicting Views
There is an active, often sensationalist, debate underway over
the impact of cognitive technologies on employment. One side

rotmanmagazine.ca / 63
 Automating entire processes or jobs is unlikely
to become common in the near term.
forecasts massive unemployment as these technologies take on
work formerly done by people. The other predicts a new incar-
nation of a familiar historical pattern of technological change:
new technologies increase productivity, which increases wealth,
drives economic growth, and creates demand for workers with
new skills.
A widely-cited recent analysis by researchers at the Univer-
sity of Oxford is an example of the dark side of the debate. The
study estimated that 47 per cent of total U.S. employment is ‘at
risk’ from computerization over the next decade or two. Gartner
Group, an information technology research firm, takes a similar
position, forecasting that one in three jobs will be taken by soft-
ware or robots by 2025. Three Gartner analysts have offered a
starker ‘strategic planning assumption’: by 2030, 90 per cent of
jobs as we know them today will be replaced by smart machines.
Not everyone believes organizations should begin preparing
for a future without jobs and workers. MIT Professor David Au-
tor believes the degree to which machines will substitute for hu-
man labour is often overstated. “The challenges to substituting
machines for workers in tasks requiring adaptability, common
sense, and creativity remain immense,” he writes. He argues
that strong complementarities between machines and human la-
bour, which “increase productivity, raise earnings and augment
demand for skilled labour,” are not receiving enough attention.
Rodney Brooks, a robotics expert and founder of two promi-
nent robotics companies, believes that technologies like robotics
are more properly seen as “getting rid of a really dull job that we
shouldn’t be torturing people with,” rather than putting people
out of work.
We favour the more positive view of the future. While good
progress is being made in applying cognitive technologies to
narrow domains, automating entire processes or jobs is unlikely
to become common in the near term. More likely, especially in
the next three to five years, parts of jobs will be automated by
cognitive technologies. Workers — including knowledge work-
ers — will be interacting with automated smart machines, as air-
line pilots and workers in advanced factories do today. For this
reason, it is crucial for business leaders to take a closer look at
the coming impact of cognitive technologies on work, workers,
and organizations.
64 / Rotman Management Fall 2016
The Automation of Work
In previous work, one of us (David) along with other colleagues
analyzed over 100 applications of cognitive technologies, and
found that these applications tend to fall into three main catego-
ries — each of which has distinct impacts on work and workers.
Products. Product applications embed cognitive technologies
in products to provide ‘intelligent’ behaviour, natural interfaces
(such as speech and visual) and automation. The impact of prod-
uct applications on workers ranges from none (robotic toys or
intelligent thermostats), to marginal (robotic vacuum cleaners
may reduce hours demanded of house cleaners), to significant:
autonomous vehicles are already displacing mining truck drivers
and train operators, and may one day take jobs from taxi drivers
or truckers; and robots may reduce demand for bricklayers and
tile setters.
Processes. Process applications use cognitive technologies to
enhance, scale or automate business processes. Examples of
this include automating data entry with automatic handwriting
recognition, automating planning and scheduling with planning
and optimization algorithms, and automating customer service
with speech recognition, natural language processing, and ques-
tion-answering technology. By definition, process applications
tend to have a direct impact on workers whose jobs were fully or
partly automated. As we will see below, automation may pres-
ent challenges to organizations and doesn’t always produce the
desired results.
Insights. Insight applications use cognitive technologies to re-
veal patterns, make predictions and guide more effective actions.
Intel, for instance, has employed machine learning to recom-
mend to its sales force which customers to call next and what to
offer them. Some insight applications can be seen as a form of
automation: the decision of what to do next in a given situation,
rather than being made by a person, is made by a machine. Oth-
er insight applications enhance, rather than automate, existing
decision-making processes, or perform analyses that were not
being done before. Sometimes they join a form of machine learn-
ing to other cognitive technologies such as computer vision or
 Skills such as critical thinking, general problem solving and
tolerance of ambiguity are likely to become more valuable.
natural language processing. For instance, one startup company
is combining computer vision and machine learning algorithms
to infer the performance of retail stores from satellite images of
their parking lots.
Unintended Consequences of Automation
The idea of introducing automation to improve upon the flawed
performance of humans may seem compelling; but automated
systems can have flaws, too. And leaving human operators to
handle only tasks that cannot be automated may create its own
problems. For instance, tasking humans with monitoring a pro-
cess that has been automated can cause errors and anomalies
to go unnoticed. Studies have shown that it is effectively im-
possible for even a highly motivated worker to pay attention
for more than about half an hour to an information source that
hardly changes.
Also, people tend to lose their skills if they are not practiced
regularly. This can lead to the ironic situation in which, precisely
when humans need to take command of an automated system,
such as an autopilot, they are ill-prepared to do so. Occasion-
ally this has had tragic consequences. Even without de-skilling,
researchers have found, excessive, poorly-designed automation
can reduce attention and performance on some tasks. Studies
have shown that in driving, for instance, too much automation —
such as the use of cruise control — can make drivers less vigilant,
reducing performance at tasks such as emergency braking. Other
studies have found that automated systems (like bad bosses) can
undermine worker motivation, cause alienation, and reduce sat-
isfaction, productivity and innovation.
Recognizing the potential problems associated with auto-
mation, researchers have looked for objective ways to determine
which functions of a system should be automated, and to what
degree. To address this need, University of Miami Professor A.
Parasuraman et al developed a framework to analyze automa-
tion options, proposing that automation can be applied to four
broad classes of functions:
• Information acquisition;
• Information analysis;
• Decision and action selection; and
• Action implementation.
Within each of these types, automation can be applied across a
continuum of levels, from low to high — i.e., from fully manual
to fully automatic. The authors suggest that an automation de-
sign should be evaluated first by examining its consequences on
human performance, and second, by considering factors such as
automation reliability and the costs associated with the conse-
quences of the actions or decisions involved. This widely-cited
work is one of multiple attempts in the field to guide automation
design decisions.
To complement the academic work on automation design,
we propose a framework that highlights the perspective of the
worker affected by automation and enables us to assess the busi-
ness implications of various automation choices. This framework
may be particularly useful for leaders considering the impact of
cognitive automation on creative or knowledge work.
Viewed in terms of its impact on the worker and her relation-
ship to her duties, we have identified four main approaches to
automation. We will illustrate how each plays out by focusing on
one job — translator — and one cognitive technology — machine
translation.
REPLACE. With the replace approach, the entire job a translator
used to do — such as translating technical manuals — would be
eliminated, along with the translator who did it.
AUTOMATE. In the automate approach, machine translation would
be used to perform much of the work — imperfectly, given the
current performance of machine translation — after which a pro-
fessional translator would edit the automatically translated text
— a process called ‘post-editing’.
RELIEVE. A relieve approach might involve automating lower-
value, uninteresting work and reassigning qualified professional
translators to more challenging material where quality standards
are higher — such as marketing copy.
EMPOWER. Finally, in the empower approach, translators would
use automated translation tools to accelerate or improve some
of their tasks — such as suggesting several options for translat-
ing a phrase — but the translator would be free to make choices.
rotmanmagazine.ca / 65
 Levels of Automation
HIGH
The computer decides everything and
10 acts autonomously, ignoring the human
informs the human only if it, the computer,
9 decides to
8 informs the human only if asked
executes automatically, then necessarily
7 informs the human
allows the human a restricted time to
6 veto before automatic execution
LOW
executes that suggestion if the human
5 approves
4 suggests one alternative
3 narrows the selection down to a few
offers a complete set of decision/
2 action alternatives
the computer offers no assistance: humans
1 must take all decisions and actions
FIGURE ONE
This could increase productivity and quality while leaving the
translator in control of the creative process and responsible for
aesthetic judgments.
Maximizing the Value of Workers and Machines
When it comes to the impact on and use of labour, organizations
need to do more than sort through the four main automation
choices discussed above. To properly evaluate their options, they
need to choose between a cost strategy and a value strategy. A cost
strategy uses technology to reduce costs, especially by reducing
labour; while a value strategy aims to increase value by comple-
menting labour with technology or reassigning labour to higher-
value work.
Here’s how each of the four automation choices could play
out differently under the two strategies.
66 / Rotman Management Fall 2016
REPLACE. With the cost strategy, organizations replace workers
with cognitive computing systems that perform equivalent work.
The financial appeal of this choice is clear, but limited to the cost
savings that it might achieve. Organizations may produce greater
value by reassigning workers to new roles, or expanding their
roles. Or, they might seek to deploy cognitive systems that not
only substitute for human workers but provide superior perfor-
mance, measured in speed or quality, for instance. These are ex-
amples of the value strategy.
AUTOMATE. Automating work to reduce labour costs is an example
of the cost strategy. As we’ve seen, this can be disempowering
and alienating to creative people, the highly skilled, or artisans. A
value strategy might use this approach to create new lower-cost
offerings that serve the needs of a new market segment. For in-
stance, translation-service providers could offer a range of quali-
ties at different prices by varying by the level of automation used
in the translation and using less-experienced translators to per-
form post-editing.
RELIEVE. A cost strategy might realize the benefits of efficiency
with this automation choice by reducing headcount. An example
is call centers that automate first-tier customer support in order to
reduce staffing levels. A value strategy, on the other hand, might
expand or shift the focus of the workers to higher-value tasks.
For instance, when a new automated engineering planning sys-
tem saved the expert-level engineers of the Hong Kong subway
system two days of work per week, they reallocated their time to
harder problems that require human interaction and negotiation.
EMPOWER. A cognitive system may empower lower-skilled work-
ers to perform tasks that were formerly performed by higher-
skilled workers. This is an example of the cost strategy at work.
A value strategy might employ a system not only to empower
lower-skilled workers but also to train them and build their skills.
It might also be designed to enhance the performance of even
highly skilled workers.
It should be noted that cognitive automation, even in systems
intended to empower workers, may meet with resistance. An
 Automation Choices Under Cost
and Value Strategies

Automation COST VALUE

Choice Strategy Strategy

Replace Eliminate worker Reassign worker

Replace/ Accelerate work, Create new low-

Automate reduce staff, cost offers, employ
possibly alienate lower-skilled,
creative workers less-experienced
illustration of this can be found at Intel, which, as mentioned and artisans workers
earlier, developed a cognitive system to improve sales productiv-
ity. The system used machine learning to classify customers and Relieve Eliminate routine Redeploy people
tasks, increase to higher-value
guide sales people on what to offer different customers. Some
productivity, tasks; create more
members of the sales team were initially resistant to following
reduce staff value for customers
the advice of the machine-learning system — possibly because
they resented that their salesmanship was being subordinated to Empower Increase perfor- Increase workers’
a machine. But after an initial group adopted the system and saw mance of workers performance
a dramatic improvement in productivity, the rest of the team and enhance
was quick to follow. their skills

Some Skills Will Become More Valuable FIGURE TWO

As organizations put cognitive technologies to work, they have

to consider more than what to automate and whether to adopt
a cost or value strategy. They must also take a fresh look at what
skills they are going to need in their workforce. As routine tasks
are increasingly subject to automation by cognitive and other
technologies, the skills required to perform those tasks will tend
to become less valuable.
On the other hand, the skills required to perform broadly
or loosely-defined jobs — skills such as common sense, gen-
eral intelligence, flexibility and creativity — and those required
for successful interpersonal interactions — such as emotional
intelligence and empathy — are likely to become relatively
more valuable. This is because, as Prof. Autor points out, “tasks
that cannot be substituted by computerization are generally
complemented by it.”
Autor identifies a number of skills that tasks resistant to
computerization tend to require. These include problem-solving,
intuition, creativity, persuasion — required to perform what he
calls ‘abstract’ tasks — and situational adaptability, visual and
language recognition, and in-person interactions — required
for what he calls ‘manual tasks’. It is not hard to find examples
of tasks like these that have been automated. Consider for in-
stance: Google Maps solving navigation problems, Chef Wat-
son devising new recipes, suggestive selling on Amazon.com,
and robotic store clerks at retailer Lowe’s. Automating narrowly
defined tasks like these is much easier than automating broadly
defined ones.
Even if automated navigation, scheduling and configuring
are here today, automated general problem solving is not on the
horizon. As cognitive technologies automate narrowly-defined
tasks, the skills and temperament necessary to size up and ex-
ecute broadly-defined tasks — such as critical thinking, general
problem solving, tolerance of ambiguity, drive and resourceful-
ness — are likely to become more valuable.
Designing products, services, entertainment, or built envi-
ronments that delight people is unlikely to be a job for comput-
ers any time soon. There are tools that can make this kind of in-
novation more reliable, such as best practices, market research,
A/B testing, and the like; but the core task of creating something
novel, beautiful or delightful requires not only technical skills
specific to a discipline such as product design or film making, but
also humanistic skills of empathy and openness to serendipity.
Organizations that employ these skills to understand and delight
their human customers have always been able to distinguish
themselves, and will continue to.
Providing the highest-quality customer service experience
is also likely to remain a job for people. Even as cognitive technol-
ogies make possible increasingly high-quality and personalized
automated service, there is currently no substitute for the quality

rotmanmagazine.ca / 67
 Designing products, services, entertainment,
or built environments that delight people is unlikely
to be a job for computers any time soon.
of experience provided by a well-trained and well-equipped hu-
man possessed of a high emotional intelligence, energy, and em-
pathy. Businesses that seek to develop and maintain high-value
relationships with demanding customers will continue to rely on
the human touch in relationship management and service.
Strategic Workforce Planning
Introducing technology into a workplace always affects work-
ers, but cognitive technologies affect people in new ways. This
presents challenges that require multidisciplinary solutions. In
conversations with dozens of chief human resources officers, we
have found that few companies have plans in place to address
these challenges. Business, talent, and technology leaders must
work together to analyze the issues and opportunities presented
by cognitive technologies and propose a path forward. An effec-
tive approach would include the following elements:
Forecast. Technology leaders assess the current capabilities of
cognitive technologies and develop a view of the trajectory of
their performance over the next five to ten years.
Analyze impact. Business and talent leaders analyze the adop-
tion of cognitive technologies among competitors and leading
firms in other sectors and its impact on work design and work-
force requirements.
Develop options. Joint business/technology teams develop op-
tions for applying these technologies in current and future busi-
ness processes to generate business value, including operating
and strategic benefits.
Create scenarios. Based on the applications identified above,
talent leaders use the talent-technology model presented here to
develop scenarios for redesigning work and restructuring work-
forces. Scenarios should consider, among other factors, how in-
creasing productivity may reduce the demand for labor in certain
functions and how certain skills will become relatively more im-
portant while others will become relatively less so.
68 / Rotman Management Fall 2016
Run pilots. Develop and deploy pilots of cognitive applications
in one or more processes and talent leaders study the human
capital impacts, opportunities, and challenges.
Develop skills. Talent leaders plan to recruit for and develop the
skills likely to become relatively more important, including cre-
ativity, flexibility, empathy, and critical thinking.
In closing
The adoption of cognitive technologies will change the employ-
ment landscape in the coming years, inevitably leading to the
elimination of some jobs. It will also lead to the redesign of other
jobs and the introduction of new kinds of work. Workers whose
skills are complemented by cognitive technologies will thrive,
while those whose skills are being supplanted by smart machines
may struggle.
Leaders face choices about how to apply cognitive technolo-
gies. These choices will determine whether their workers are
marginalized or empowered, and whether their organizations
are creating value or merely cutting costs. There is no single
right set of choices to be made. As leaders prepare to bring cogni-
tive technologies into their organizations, they should consider
which set of automation choices will fit best with their talent and
competitive strategies.
David Schatsky is a senior manager of
innovation with Deloitte LLP, based in New
York City. He is the author of Signals for
Strategists: Sensing Emerging Trends in Business
and Technology (RosettaBooks, 2015). Jeff
Schwartz is a principal with Deloitte Consulting and the firm’s global Human
Capital Leader. He is the co-author of Global Human Capital Trends 2015:
Leading in a New World of Work (Deloitte University Press, 2015).
SHE’S INTO
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GRANOLA.

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How to Disrupt
Financial Services:
An Interview with Peter Aceto
The CEO of Tangerine (formerly ING Direct Canada) tells
Rotman Accounting Professor Francesco Bova how he leveraged
diversity of thought to give the big banks a run for their money.
Interview by Francesco Bova
A lawyer by trade, you were hired as ING Direct Canada’s gen-
eral counsel — and eighth employee — in 1996. What drew
you to the company?
The truth is, luck had a lot to do with it. The year before, I had
gone with my father to his mechanic’s, and Arkadi Kuhlmann
[founder of ING Direct] just happened to be there. While we
waited for our cars, we chatted, and he told me about his vision
for the bank. When I left the auto shop that day, I just knew I had
to be a part of it — so I tracked him down and asked for another
meeting. I basically told Arkadi flat out that I wanted to work for
him; and after a few interviews, he agreed.
I served as general counsel for a while, but given the open
culture of the bank, I soon became involved in lots of other as-
pects of the business. I went on to help launch ING Direct in the
U.S., before becoming CEO of the Canadian division in 2008.
The banking industry in Canada is very concentrated, and
there are significant barriers to entry for new players. How
did Tangerine prepare for this challenge?
As you indicate, we have five or six very well established banks,
all of which are 100 to 180 years old. In order to make inroads
in a market like that, you really have to know what people love
about their banks — and what they don’t love about their banks.
If you’re going to make an impression, you have to offer some-
thing totally different. The way our business was created, culture
came first: the only way to be different was to be different on the
inside. We considered that in everything we did — including who
we hired.
We have behaved differently from the start, right down to
the fact that our people don’t have offices, and we generally don’t
hire people from the banking community. As we have evolved
and our competitors have attempted to match what’s different
about us, we have had to continue to differentiate ourselves.
One early innovation was, you made it much easier to trans-
fer money from another bank to Tangerine. Did ideas like that
come from your employees, or were they dreamed up at the
executive level?
I was just having this discussion with my team the other day. We
were reflecting on some of the risks we took that really paid off,
and we literally could not remember whose ideas they were! That
is actually really great news. I find most business people only
rotmanmagazine.ca / 71
I greatly admire the wisdom that Socitiabank showed in keeping [Tangerine]
separate from themselves, so that we could maintain our culture.
want to present an idea when it’s 95 per cent formed, and they
have data to prove it. In our culture, you might present an idea
that’s 50 per cent formed, so that the team can run with it and try
to turn it into something.
Recently I was in Ottawa, speaking at a conference. In one of
the breakout sessions, there were 40 people in the room, sitting at
six or seven tables, and each person was provided with a bag con-
taining six pieces of yellow Lego. The request from the facilitator
was, “Make a duck with your Lego blocks.” So, each of us created
a duck, and then the facilitator asked us to look around the room.
Not one duck was the same. This was an epiphany for me.
What occurred to me immediately was, ‘How can we har-
ness that amazing diversity of thought?’ Why is it always just
Meeting the Fintech Challenge by S. Davies, M. Kashyap and J. Ruetschi
A few years ago, a group of seemingly-modest startups began of-
fering consumers limited online lending or retail-payment services.
These ‘fintechs’ operated in the margins and didn’t pose an obvi-
ous threat to established financial-services companies.
Today, fintechs are rapidly entering the mainstream. Some
startups, like Lending Club, have become household names. And
more established tech companies, including Apple, Google and
Samsung, have also begun to offer fintech applications. Each
delivers (or plans to deliver) highly focused financial-services
applications, often more effectively and less expensively than
traditional companies. They have been attracting customers in
larger numbers, leaving incumbent financial-services firms with
no choice but to take notice.
In such fields as online lending, money transfer and credit
ratings, fintech companies are breaking the dominance of financial
services’ largest players in novel ways. Some, for example, are
developing next-generation ‘robo-advisors’ that better design
savings solutions on the basis of goals and risk appetite, without a
bias toward any particular product. One fintech innovator has engi-
neered a new method for capturing and sifting data to spot fraud
and monitor trading activity — a formula it had originally designed
for medical cancer screening.
In a sign of just how significant fintech has become, global
funding of these startups in the first three quarters of 2015 reached
US$11.2 billion, nearly double the funding of the full year before,
according to CB Insights.
So far, most incumbent financial institutions have responded
to the fintech challenge in one of three ways. The first group has
72 / Rotman Management Fall 2016
one or two ideas being considered? Think of all the opportu-
nities we are missing out on! With a more inclusive culture —
where more people are involved in the decision-making process
— hopefully, you can take ideas, improve upon them, and end
up with a better product at the end of the day.
This is part of the reason I have become known as ‘The
Tweeting CEO’. I regularly tweet my ideas and ask for feedback
from my followers.
By your own admission, you are not cut in the mold of a tra-
ditional banker. Does this help or hinder you as the CEO of a
bank?
As indicated, I’m a lawyer by trade, and I can assure you that
adopted a ‘wait-and-see’ approach, conserving resources until clear
winners emerge. These firms risk being caught unprepared when the
threat to their business becomes more imminent. The second group
has acquired fintech firms to gain access to new technologies. But
they have often had trouble with integration. The third group includes
companies investing significant time and money in fixing their own
existing IT landscape, which is typically fragmented and complicated
by legacy systems that are hard to maintain and upgrade.
Many of these institutions hope to replicate fintech’s approach
internally by establishing innovative, agile teams to develop new of-
ferings rapidly, with an emphasis on digital features, such as mobile,
social media and data analytics. But these internal teams are saddled
with decades-old infrastructure, regulatory burdens and entrenched
interests. Although earmarking more funds for IT improvements is a
constructive activity for most organizations, it pales as a response to
the emergence of fintech. It’s difficult for firmly rooted IT departments
to be as agile as fintech startups.
If you are a financial-services executive, you may be wary —
and rightfully so — of all these tactics. There is, fortunately, one more
strategy you can employ that will borrow certain useful aspects of
these approaches while putting your company in a better position
to succeed: reorient your firm as the dynamic centre of a fintech
ecosystem.
Instead of managing the entire customer experience through
your bank’s legacy systems and processes, you should make the
most of your position of trust with your customers, your access to
customer data, and your knowledge of the regulatory environment.
Explore the financial technologies around you, with an eye to finding
none of the established banks would ever hire me as their CEO
— so my only chance in this arena was to come at it as a chal-
lenger. But I work with bankers every day, and I really value
my relationships with Scotiabank [which bought ING Direct
Canada in 2012]. I greatly admire the wisdom they showed in
keeping us separate from themselves, so that we could maintain
our culture.
The fact is, in order for us to be different, we really do need
to think differently about things, and in that respect, my non-tra-
ditional background has helped me. Here’s an example: I think
everyone knows what a tax free savings account (TFSA) is. A few
years ago, the government announced that it was going to create
a new sort of form of ‘RRSP TFSA’, featuring accessible funds.
new products that you can fit together distinctively and make avail-
able to your customers.
Rather than expending resources on in-house product de-
velopment or basing your R&D investment on a prediction of the
future contours of an industry in flux, this approach involves look-
ing outward: assessing third-party technology providers based on
what they offer and how well you might partner with them, choosing
software and apps that fit your financial institution’s business criteria,
and interfacing with the providers to quickly offer their solutions
as part of a coherent integrated product. Focus on what your own
company does best — for instance, identifying investment themes,
assessing credit exposure, managing counterparty risk, or executing
and settling financial transactions. And then tap into the fintech pool,
by establishing partnerships, to gain access to innovation that can
support or expand your organization’s core market.
Make no mistake: For many traditional financial institutions,
this strategy will require a fundamental shift in identity and purpose.
Your organization’s culture must change from ‘protecting my turf’
— that is, defending your existing products, services, and customer
relationships — to a culture that is forward looking, that responds to
customer demands relatively quickly, and that can adopt new tech-
nologies as they evolve.
You will probably need to develop a new institutional capability
to constantly screen new technologies, decide which make the cut
and which do not, and then plug these pieces into your information
technology architecture (and that of the other companies in your
technological ecosystem). Elements of this capability would include
granular insight into customer preferences, the ability to partner ef-
We got some advice from financial consultants, who felt that this
was a good ‘defensive’ product: if our customers asked for it, it
would be good to have it on offer; but it really wasn’t going to
change the game.
I vividly remember that as soon as the consultants left the
room, my team’s eyes were opened wide, and someone said,
‘Wait a second. This is the greatest opportunity we’ve seen in
30 years. We can be the first to create a brand new category of
account!’ They went away and figured out how to launch Can-
ada’s first TFSA — three months before it was supposed to be
launched in the country. The opportunity to be the first mover
doesn’t happen often, and it’s easier to get market share as a first
mover and then fight to keep it, than it is to try and steal it from
ficiently with external companies and the managerial skill to undo
those integrations when better technologies emerge.
Changing any business model is difficult; transforming into a
fintech-focused organization is also potentially harmful. Quickly
integrating a raft of different technologies and new products,
while raising the learning curve for account holders and employ-
ees, could easily produce frustrating customer experiences. For
that reason, you must set high standards for customer interac-
tions and be able to draw a comprehensive picture of people’s
expectations for the firm’s brand. Your service and brand metrics
should serve as primary guidelines for choosing new technolo-
gies to embrace.
Given how fast financial technology and consumer tastes
change, incumbent financial institutions cannot afford to ignore
fintech. With a little bit of planning, a lot of focus, and some good
relationships with outside innovators, you can place your firm at
the centre of customer activities. This will give you a position of
strength — no matter what new innovation is waiting around the
next corner.
Steve Davies is PwC’s UK and EMEA fintech leader. Manoj Kashyap is
a partner with PwC U.S., based in San Francisco, and also serves as the
firm’s global fintech leader. Joerg Ruetschi is a director with PwC UK.
© 2015 PwC. All rights reserved. “strategy + business” is a trademark of
PwC. Read the full article at strategy-business.com/article/Meeting-the-
Fintech-Challenge
rotmanmagazine.ca / 73
others, particularly when you’re a challenger. So, we launched
our TFSAs in October, before they became widely available in
January — and the take up was incredible.
In 2012, ING Canada was acquired by Scotiabank and re-
branded as Tangerine. Have you been able to maintain your
disruptive culture despite the fact you’re now part of one of
‘the big six’?
Right from the beginning, Scotiabank was the one to say, ‘We un-
derstand that your culture is different, and we don’t want to do
anything to squeeze the uniqueness out of you. We want you to
continue to be distinctive and separate.’ They knew full well that
if we continued to grow, we might steal some business from them
— but they also knew that we would be stealing a lot more busi-
ness from their competitors, and that together, we would win.
Of course, we needed to build bridges between the two
companies, so I spend a little more time downtown than I used
to. We’re in a regulated industry, so we have to do some manda-
tory things. But the art of that is to ensure we’re being compli-
ant, make sure they understand what we’re doing — but not to let
them influence us too much.
A year after being acquired by Scotiabank, we changed our
name to Tangerine. This was the result of a 12-month process
whereby we consulted with more than 10,000 Canadians —
employees and clients — through qualitative and quantitative
research. The process was focused on a fundamental need to
stay true to ING Direct’s simple, progressive and transparent ap-
proach to banking, while also reinforcing to clients and employ-
ees a continued focus on innovation.
Today, if you carefully read some of Scotiabank’s disclo-
sures, it is clear they are thinking about how to leverage us to
move forward faster. In fact, all of our competitors in Canada are
now talking about doing what we’ve been doing — using tech-
nology to make banking simpler and easier for customers. So
now we have to figure out how to differentiate ourselves again.
You’ve done really well from a customer perspective: for the
past four years, JD Power has ranked Tangerine #1 for cus-
tomer satisfaction. You’ve talked about the importance of
knowing which customers are right for you — and which are
not. How do you determine that?
One metric that has been very important to us from the be-
ginning is referrals from friends and family. Every year, some-
where in the neighbourhood of 50 per cent of new customers
come from referrals from our existing customer base. This has
been fundamental to our success. Of course, as we’ve evolved
74 / Rotman Management Fall 2016
over time, our marketing efforts have become more sophisti-
cated, and we’ve become clearer about who our customer is. The
segment that we’re interested in — and the segment that is in-
terested in us — is what we call ‘direct-ready consumers’. These
are Canadians who are willing to buy one or more products from
a bank that has no brick-and-mortar branches; meaning, they’re
never going to meet you. We believe there are somewhere be-
tween 10 and 12 million of these people in Canada today.
Some people are more than happy to have their savings and
chequing accounts with us — but for other accounts, they still
want to have a relationship with someone where they get togeth-
er face to face for advice once a year. So, sometimes, we get the
whole customer, and sometimes we get part of the customer. We
have to be very clear about catching the right fish. If we catch the
wrong fish, two things will happen: one is, we will never make
them happy. If they need to see and talk to us all the time, if they
need a lot of advice and hand holding, we will let them down,
because we’re not built for that.
We’ve all heard about Pareto’s 80/20 rule — that 20 per cent
of your customers create 80 per cent of your work. But if 80 per
cent of our work is being dedicated to 20 per cent of our custom-
ers, our model will not work anymore. Through our history, we
have had to ask certain customers to leave — you could perhaps
refer to it as ‘firing’ customers. Sometimes, we will very happily
say, ‘we’re done’. Of course, we’ll give them all their money back
and pay them every nickel of interest; but it’s very important to
be thoughtful about attracting and building relationships with
the right kinds of customers.
You mentioned not having traditional brick and mortar
branches; but your Tangerine Café’s are brick and mortar.
What is their purpose?
Our thinking continues to evolve on the Cafés. We currently have
five: one in Vancouver, Montreal and Calgary and two in Toronto.
They were originally created for a very specific purpose. In our
very early days, people would call us and say, ‘Hey, I’d like to be
a customer, but I really want to come and see you, just once!’ We
would explain that we are not that kind of bank, but they were
persistent in wanting to meet us. Some people would drive two
hours just to meet us. We are a very low cost operation, so they
would arrive at our little, unimpressive building, in the north
part of the city, and we’d take people off the phone to meet these
visitors in our little executive boardroom. After a while, we recog-
nized that this arrangement wasn’t sustainable.
Some retail space became available in our building, so we
figured we could use that for these one-time only meetings. We
 It’s very important to be thoughtful about attracting and building
relationships with the right kinds of customers.
really needed to make sure that it didn’t look like a branch — it
had to be different. So it became a café, and we served coffee.
It was very open concept and didn’t look like a bank at all — but
despite our efforts, people would still find places to form lines; it
was fascinating.
We understand that having some physical presence is im-
portant to some people. People still say to us, ‘I really like what
Tangerine stands for, but I’m not a customer, because the lack
of physical presence makes me uncomfortable.’ Our Cafés serve
multiple purposes, but mainly, they help alleviate the feeling
that we’re ethereal and mysterious in some way. Just knowing
that there is a place to go, if they have a problem, helps these
customers a lot.
Now, we are evolving into what we call mobile pop-ups:
imagine an Apple store in a shipping container. It’s really low
cost, and we can put these in areas where we know there are di-
rect-ready consumers. They can come and see us in person once,
in a very low cost way, have a wonderful experience, and leave
with a debit card and a fully-funded account.
Most, people are not saving enough money for the future.
What are you doing to improve the financial habits of your
customer base?
Our business was built on a foundation of savings, and trying to
encourage Canadians to save more, in an automated way. About
40 per cent of our customers have an automatic savings pro-
gram, whereby they ‘pay themselves first’ every single month.
We also do that in our mutual fund portfolio, and our mortgage
product has been referred to as ‘the un-mortgage’, because we
have the most generous prepayment option out there. We found
that, even at the worst point of the financial crisis, our customers
did very well, because many of them are living a more healthy
financial life.
As we go forward, this is a wonderful area for Tangerine to
further differentiate itself from its competitors: to really help
people feel empowered to live a healthier financial life. Everyone
wants to do this, but most people are really struggling with it.
Now that there are more direct-ready customers out there,
and you’ve reached a critical mass in terms of customer base,
what sort of innovations are you looking at?
Our business was predicated on being a savings business and a
mortgage business, but now that there is this very large group
of direct-ready Canadians, we’re moving towards becoming an
everyday bank. In the last three years, we’ve launched a no-fee
chequing account that pays interest, and we recently launched a
credit card, which is a very exciting opportunity for us. We also
coined the tem ‘spaving’, which acknowledges the connection
between saving and spending: if you spend more you save less,
and if you spend less you save more. We want to use this concept
to help people save more.
How would you describe your leadership style?
I have found that in general, the people who have success are
those who put the team before their own individual accom-
plishments. The key is to find a continuum where people are re-
warded and incented for doing this, yet through their career and
their life, they get to develop and grow, as well. That basically
describes the privileged environment that I’ve been working in
for the last 20 years.
As indicated, our purpose is to help Canadians live better
lives, and we think a financial institution is in the best position
to do that. Our people feel proud to work for an organization
that is focused on this. Basically, employees have to make a
choice every single day: how much am I going to give today?
They might be tired — maybe they stayed up late last night. Do
they want to give 100 per cent today? Everyone has that choice,
so you have to create an environment where people choose to
give you everything they have.
I’m only 47 years old, so I’ve got a lot more learning to do. If
I write a book 10 years from now, my guess is that it will be very
different; but I would hope that the core values expressed would
be the same.
What’s the best piece of advice you’ve ever received?
Very early in my career, Arkadi said to me: “I know what you’re
good at, and I know what you’re not good at; but to others, you
appear perfect. No one wants to follow someone who’s perfect—
people want a leader who is real. Just be yourself, and people will
love the real you.” The more I thought about this, the more liber-
ated I felt. It’s so much easier to focus on the work when you can
just be yourself.
Peter Aceto is CEO and President of Tangerine. With nearly 1,000
employees in Canada, Tangerine (formerly ING DIRECT) is the country’s
leading direct bank, the 7th largest deposit taker and 6th largest mortgage
originator. It also provides mutual funds to its over 1.6 million customers.
Peter is the author of Weology: How Everybody Wins When We Comes Before
Me (HarperCollins 2015).
rotmanmagazine.ca / 75
 BLURRING
THE LINES:
Preparing for Convergence
in Health and Life Sciences
Massive opportunities exist to lead the transformation
of the global healthcare marketplace.
by Kais Lakhdar, Georgina Black and Will Mitchell
TODAY, BOTH PUBLIC AND PRIVATE PAYERS for healthcare services
throughout the world are imposing strong demands for efficien-
cies. At the same time, unconventional competition is arising
from newly-converging technologies and services, creating a
platform for transformative change in healthcare quality and ac-
cess.
This disruption is challenging existing actors in the health-
care sector while at the same time, creating opportunities to
design stronger systems. Perhaps more than ever, commercial
players are at the centre of the opportunity to achieve a stronger
balance of quality, cost and access to healthcare services.
The core demand is straightforward, if difficult to accom-
plish: companies across the health and life sciences sector need
to realign their goals with the changing nature of the health
system, while identifying profitable opportunities to lead col-
laborative efforts with system stakeholders. Traditional life sci-
ences companies — including pharmaceutical, medical device,
pharmacy, and diagnostic health service providers — as well as
non-traditional players such as retail, technology, telecommuni-
cations and elder-care providers are already beginning to engage
in the revolution.
In this article we will showcase examples of health-sector
convergence and outline the key questions for-profit organiza-
tions need to address as they seek success in this emerging land-
scape.
The Drivers of Change
In the current environment, three sets of market and technologi-
cal forces are reshaping how healthcare is managed, delivered
and experienced.
1. SHIFTING DEMOGRAPHICS, UNCERTAIN ECONOMIC GROWTH AND
VALUE-BASED PAYMENTS. Every traditional developed market
in the world faces the challenges posed by an aging popu-
lation. In Canada, for instance, the population over age 65
now outnumbers youths under age 15, and by 2036, the pop-
ulation of those older than 65 will more than double. This
shift towards a population with high needs for healthcare
services, combined with only moderate long-term economic
growth prospects, suggests that today’s era of fiscal caution
is here to stay. Faced with growing demands for care, health-
care payers are increasingly focusing on outcomes, while
aligning reimbursement to value-based pricing models. Par-
ticipating organizations need to reshape their pricing and
service models accordingly — or face failure.
rotmanmagazine.ca / 77
 More than ever, commercial players can participate in creating a stronger
balance of quality, cost and access to healthcare services.
2. A PROLIFERATION OF HEALTH INFORMATION AND CHANGING PA-
TIENT EXPECTATIONS. The increasing availability of personal
health information, combined with advances in patient-
engagement technology, is creating more informed and de-
manding patients. In turn, models of care that encourage
greater patient participation are demonstrating reduced
costs, better patient outcomes, and higher quality — partic-
ularly for people with chronic diseases. Strategies that help
to generate and use this data will be integral in bridging tra-
ditional silos of care and in optimizing the timing and loca-
tion of care.
Traditional life sciences firms are beginning to take
note. For example, the pharmaceutical industry, which tra-
ditionally engaged primarily with providers, is now reach-
ing out directly to patients via new channels such as mobile
applications (‘apps’). As of 2014, the top pharmaceutical
companies averaged 65 apps in the Apple and Google Play
app stores, compared to one or two from the average health
app publisher. At the same time, the proliferation of new
data about patient behaviour, treatments and outcomes is
shifting the boundaries of the healthcare sector. Traditional
healthcare analytics firms such as Cerner, McKesson and
others are actively innovating in this space. In addition,
thousands of start-ups—together with major initiatives by
diversified entrants such as Apple, IBM, Google, Intel, Mi-
crosoft, Telus, and many others — are experimenting with
new forms of electronic health records, cloud computing,
predictive analytics, and ongoing advances in digital tech-
nology, often in partnerships with pharmaceutical and de-
vice companies. Despite all of this activity, we are only in the
early stages of understanding how advances in health data
will fundamentally reshape the healthcare sector.
3. CHANGING CUSTOMER-SUPPLIER RELATIONSHIPS. The commer-
cial sector cannot continue to operate simply as transaction-
al — and often adversarial — suppliers to healthcare provid-
ers and payers. Instead, companies need to work as strategic
partners to help redesign care pathways, improve workflows
and bridge system silos, all while demonstrating high qual-
ity, cost-effective health outcomes. Innovative business
models are already emerging in which products and services
are packaged with other value-add services such as training,
patient identification and screening, population data analy-
sis and identifying best practices. Critical factors for success
in this emerging environment will include systemic innova-
tion and ensuring a deeper understanding of clients’ and
78 / Rotman Management Fall 2016
their operating contexts. Some of the winners will be lead-
ers in the existing healthcare sector, but many others will be
new entrants that seize these opportunities.
Health Sector Convergence Trends
Life sciences, private health insurance, technology, elder-care
providers and other market participants are responding to these
changes with the goal of leading health-system transformation.
Many are already investing heavily in internal R&D, as well
as using mergers, alliances and other externally-oriented go-
to-market models. Building on ongoing technological change,
these strategic responses are leading to ‘health sector conver-
gence’, whereby the lines between traditional sectors are rap-
idly overlapping.
Clearly, investors recognize the growth opportunities: 41 of
the top 100 venture capital funds are active in the health and life
science sectors. Following are three key trends they are keeping
an eye on.
1 TRADITIONAL SECTOR BOUNDARIES ARE DISAPPEARING
Faced with patent expirations and increased generic competi-
tion from firms in both developed and emerging markets, estab-
lished pharmaceutical firms are experiencing slower growth in
revenues. One response to these challenges has been diversifica-
tion into biotechnology and medical devices as companies have
embraced advances in genetics and engineering. EvaluatePha-
rma reports that bioengineered vaccines and biologic products
reached 44 per cent of sales within the world’s top 100 products
in 2014, and will likely pass 50 per cent by 2018.
Life sciences companies are also actively creating ‘combi-
nation’ products involving drugs, devices and/or biologics. As a
result, global medical-device sales have increased to more than
51 per cent of prescription drug sales in 2015, up from 45 per
cent in 2007. Examples of innovative partnerships include the
alliance between Abbott Laboratories and Novartis Pharma
AG to develop a bioresorbable vascular scaffold (BVS), which
is an innovative class of stent that delivers everolimus, a drug
that works to restore blood flow for patients with coronary ar-
tery disease.
Meanwhile, Proteus Digital Health has partnered with
Otsuka Pharmaceuticals to develop ‘digital medicine’ thera-
pies. Such therapies include medicines that communicate when
they’ve been taken, wearable sensors that capture physiologic
response, applications that support patient self-care and physi-
cian decision making, and data analytics. For example, Otsuka’s

Abilify anti-depression tablet contains a Proteus ingestible sen-
sor that communicates with a wearable sensor patch and soft-
ware applications to measure patients’ adherence to treatment.
2 RETAIL HEALTH
Supermarkets and pharmacies see opportunity in the rise of
‘community care’. Health systems across the world are increas-
ingly prioritizing evidence-based models of care that require
multidisciplinary teams. In doing so, they are shifting care away
from costly acute-care settings and into the community. This
goal creates the need for more integrated systems that bridge ex-
isting silos of acute, long-term, primary and community care, as
well as wellness and prevention programs.
New entrants to the healthcare space are responding to these
opportunities. As payers continue shifting care resources into the
community, retail-based clinics have begun to proliferate, often
in partnership with primary care chains. In the U.S., many clin-
ics are nested within major retailers such as Walmart and CVS
pharmacies, offering basic primary healthcare, often on a walk-
in basis and with extended operating hours. This challenges
traditional-care settings, while creating increased foot traffic for
retailers. This trend has also emerged in Canada, where the num-
ber of retail clinics has grown from 140 in 2011 to 224 in 2014,
as retailers such as Loblaws (which now owns Shoppers Drug
Mart), Rexall pharmacies (now part of McKesson), and Walmart
are venturing into the retail-clinic space.
3 TELECOM PROVIDERS ARE EMBRACING OPPORTUNITIES
TELECOM PROVIDERS ARE EMBRACING OPPORTUNITIES. Telecom com-
panies offer tremendous opportunities for healthcare advances.
‘Mobile healthcare’ (M-health) is diffusing as a way of mak-
ing healthcare better, cheaper and more accessible. In the U.S.,
AT&T, Verizon, Sprint and others are offering tele-health ser-
vices that engage patients and connect health system stakehold-
ers in daily healthcare practice. Meanwhile in Canada, Telus
Health was formed following the acquisition of Emergis, an
e-business for health claims processing and pharmacy manage-
ment systems. Telus has invested more than $1.5 billion to be-
come the largest electronic medical record (EMR) provider in
the country, and continues to expand into a range of other health
information technologies.
At the same time, tele-health opportunities are extending
beyond traditional rural settings into dense urban settings, par-
ticularly in the face of stronger incentives to move healthcare into
The New Health and Life Sciences Ecosystem
The new ecosystem is bringing together a mix of traditional
and non-traditional industry players seeking opportunities to
participate in the transformation of the healthcare landscape.
Payer
Provider Retail
Health
Lab Seniors’
Health
Patient
Technology
Devices
Consumer Pharma
FIGURE ONE
community settings. The inevitable evolution is to integrate data
generated by digital health applications into personal electronic
medical records. The opportunities will involve partnerships and
acquisitions among firms in the life sciences, telecom, consumer
and other sectors.
A key issue in all these activities is which firms will take the
lead in integrating the value chain — thereby shaping the evolu-
tion of new services and, along the way, determining who ben-
efits most from the commercial opportunities? The competitive
question, quite simply, is whether the next healthcare leaders
will be the current major players or, instead, a new mix of tele-
com, healthcare, consumer electronics, software and technol-
ogy companies.
Preparing for the Future
Companies that thrive in the converging healthcare market we
have illustrated will need to address a broad spectrum of busi-
ness issues, from strategy to operations, from information tech-
nology to organizational excellence and culture change. In par-
ticular, company leaders need to address two important sets of
challenges that the technical and competitive convergence are
creating for their customers.
rotmanmagazine.ca / 79
 Growth of Retailer-Based Medical Clinics in the U.S. and Canada

Projected Projected
U.S. CANADA
2,000 11% CAGR 250 11% CAGR
1866
232
224
1591 200 204
Number of Clinics

Number of Clinics
1,500 1417 185
1355
1218
150
140
1,000
100

500
50

2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

CVS Walgreens All others Rexall (Medicentres)

Walmart (Jack Nathan)
Kroger Walmart Target
Loblaws (Primacy)
U.S. retailers have been aggressively growing their investments Canada is experiencing a similar trend driven by the
in retail medical clinics as they look to capitalize on the growth growth of community-based care models and growing
in the changing healthcare landscape. interest in healthcare from retail sector companies.

FIGURE TWO

1. The Shift from Volume to Value
FOCUSED INTERVENTIONS. As payers continue to push for out-
comes, therapies will need to be more targeted, such as using
advances in genetics and pharmacogenomics that allow prod-
ucts to be paired with companion diagnostics and ensure that
the treatments are used only for patients that are likely to re-
spond. Commercial success will require thoughtful innova-
tion, together with close engagement with healthcare providers
and payers.
OUTCOME-BASED REIMBURSEMENT. As payers push companies to
take on more financial risk tied to delivering outcomes, firms will
need to develop relevant products and payment models. Effec-
tive innovation will require much earlier payer-and-provider con-
versations during the development process.
REAL-WORLD EVIDENCE AND ANALYTICS. As health systems accumu-
late data and market participants learn how to share that data,
there will be an increased emphasis on data-driven decision
making as care plans and treatments become more personalized
and care becomes more proactive. Firms will need to develop
technical, regulatory and strategic solutions that address con-
cerns about privacy, risk and accountability while gaining the
value of data integration.
FULL-LIFE-CYCLE BENEFITS AND INCENTIVES. Companies are increas-
ingly expected to demonstrate the long-term systemic benefits
of their products, yet often face fragmented purchasing markets
that inhibit effective systemic decision making. Currently, many
purchase decisions are still made based on single purchase or-
ders, without assessing system level economic and health ben-
efit implications. Companies need to do a better job of articu-
lating why their product — in many cases a convergent product
with multiple attributes — has benefits beyond a focal applica-
tion. In articulating the full life cycle of benefits, companies
need to do more than simply offering theoretical arguments
about systemic benefits; instead, they need to engage stakehold-
ers in a way that clearly demonstrates that the benefits are rel-
evant for each decision maker.

80 / Rotman Management Fall 2016

 Revenue of Top Global Medical Device Companies (2005-2019)
and Percentage Share of Prescription Drugs (2007-2015)

Although medical devices have outperformed pharmaceuticals over the past few years, going forward drugs are expected
to keep pace by and increase in approvals and US prescription drug spending.

Projected

$80 6.1%
52%
CARG

Med Device Sales as

5%
Revenue ($B)

% of Rx Sales
$60 CARG 49%
9.7%
CARG 46%
$40
43%

$20 40%

37%

2007
2008
2009
2010
2011
2012
2013
2014
2015
05

07

09

11

13

15

17

19
20

20
20
20

20
20
20

20

FIGURE THREE

2. Develop Skills That Look Beyond Traditional
Boundaries
PARTNERSHIP MINDSETS FOR REGULATORY AFFAIRS. As technologies
and therapies become more sophisticated, they will continue to
cross traditional sector and regulatory approval borders, generat-
ing more complex regulatory-approval processes. These changes
will require thoughtful discussion across commercial and regula-
tory boundaries.
distributed among firms, public agencies and academic institu-
tions. Companies will need to develop public-private collabora-
tive skills to develop and integrate these institutionally-distrib-
uted innovations.
FLEXIBLE SUPPLY CHAINS. The operating landscape is becoming
more complex, while also requiring faster adaptation. Compa-
nies need to align their internal operations and full supply base to
ensure they are able to achieve reliable quality, cost effectiveness
and timeliness.

STRATEGIC EVOLUTION OF M&A’s AND ALLIANCES. As financial pres-
sures continue and the lines between sectors blur, we will con-
tinue to see active M&A alliance activity, often involving explora-
tions into unfamiliar market and technical territory. Acquisitions
are already challenging certain aspects of incumbents’ strategy,
and companies will need to place even more attention on know-
ing when and how to use the different external sourcing modes.
PUBLIC-PRIVATE-ACADEMIC COLLABORATION. Many of the technical
and provider advances discussed herein will require that skills be
VALUE CHAIN LEADERSHIP. The need to align R&D, production, mar-
keting, sales and service activities throughout the market value
chain is becoming increasingly demanding. Companies that take
the lead in managing ecosystems of firms throughout the value
chain will create the most value for the healthcare system — and
be the most profitable.
Growth Strategies for a Changing Landscape
Companies seeking to develop strategies to seize healthcare con-
vergence opportunities must address five key questions:

rotmanmagazine.ca / 81
1. Where is your spot in the market?
• What target markets do you want to focus on?
• What value should you offer to payers, providers and patients?
Decide what role you want to play in the health system’s transfor-
mation: will you be a provider of data and information; a facili-
tator of value chain integration and collaboration; a provider of
therapeutic solutions; an enabler of supply-chain rationalization
or remote care; or a combination of these options? Whatever spot
you select, be very clear about how your choice will create a cost-
effective differentiated service that offers real value in the com-
plex marketplace of patients, providers and payers.
2. What resources do you need, and where will you get them?
• Which existing resources can you build upon?
• When you need new resources, which will you develop yourself
and which will you look outside of your firm to obtain?
Seizing convergent opportunities will inevitably require new
resources. You will need to choose whether to build new resourc-
es internally, to borrow via contracts and alliances, or to buy via
acquisitions.
3. How can we help create value and more integrated market
decisions?
• How do we identify value across channels, partners and clients?
• What coalitions of commercial partners and customers do we
need to create in order to develop ‘full life cycle’ value cases for
purchase decisions?
The increasingly distributed, patient centred, preventative
and outcome-oriented health system we have described de-
mands the development of effective partnerships. Decide where
you have opportunities to bring together relevant stakeholders
who typically do not work together to make decisions. Achieving
this goal will inevitably mean enhancing your partnership skills.
4. What organizational changes will you need to achieve the
new strategy?
• What business processes and organizational structures will you
need to support the strategy?
• What organizational constraints will challenge or prevent cer-
tain changes?
Understanding current operations and their underlying in-
ternal business processes is key to delivering your value proposi-
82 / Rotman Management Fall 2016
tion. You need an honest appraisal of how the current organiza-
tion will support your new goals — and where barriers are likely
to arise. Determining a viable structure often involves looking
outside of your organization, combining your best attributes with
those of your peers and comparators in different industries to
create fresh solutions.
5. How will you develop a change plan?
• What is your track record in achieving changes?
• How will you convince key stakeholders — both inside and out-
side of your organization — to make the necessary changes?
Participating firms will need to develop a comprehensive
communication and incentive strategy that convinces key inter-
nal and external stakeholders to engage with the coming changes
in the healthcare market.
In closing
As indicated herein, huge opportunities exist to lead the transfor-
mation of the healthcare marketplace, creating value for stake-
holders throughout the global system and generating profitable
businesses. Doing so successfully will require both the ability to
assess the emerging changes and to build organizations that are
capable of seizing the opportunities.
One thing is certain: the organizations that emerge as win-
ners in this arena will require effective engagement with public
and private stakeholders throughout the healthcare value chain
that are able to identify and lead opportunities in the local and
global healthcare ecosystem.
Dr. Kais Lakhdar is a Director
at KPMG Canada, where he
leads the Life Sciences Advi-
sory practice. Georgina Black
is a Partner at KPMG and the
national leader of the Canadian Health & Life Sciences practice. Will Mitchell
is a Professor of Strategic Management at the Rotman School of Management.
Rotman faculty research is ranked #3 globally by the Financial Times.
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The World’s
Best Innovators:
4 Things That Differentiate Them
The world’s most innovative companies draw on some common practices
to explore growth opportunities. Here’s how they do it.
by Michael Ringel, Andrew Taylor and Hadi Zablit
THE IMPERATIVE FOR INNOVATION continues to rise in importance: in
The Boston Consulting Group’s 10th annual global survey of the
state of innovation, 79 per cent of respondents ranked it as either
their top-most priority or a top-three priority — the highest per-
centage since we began asking the question in 2005.
At the same time, our research indicates that four attributes
are critical to a robust innovation strategy:
• an emphasis on speed;
• the use of technological platforms;
• well-run (and very often lean) R&D processes; and
• the systematic exploration of adjacent markets.
In this article we will take a deep dive into each of these four
practices, which are enabling innovation across industries, sec-
tors and regions.
1 AN EMPHASIS ON SPEED
Speed enables companies to catch consumer trends as they
emerge, leave competitors flat-footed, and even drive costs down
and quality up. In our survey, overly-long development times
were the most-cited obstacle to generating returns on innovation
and product development: 42 per cent of innovation executives
said ‘development times are too long’ — a six percentage point
increase over the 2014 survey.
The same frustration was shared by self-described ‘strong’,
‘average’ and ‘weak’ innovators in roughly equal measure — but
there, the similarities end. Fast innovators are much more likely
to also be strong innovators — 42 per cent, compared with less
than 10 per cent of slow innovators. Fast innovators are also more
disruptive — 27 per cent versus 1.5 per cent. They get new prod-
ucts to market quickly and generate more sales from them (at
least 30 per cent of revenue). This is true for 35 per cent of fast
innovators, but only 11 per cent of slower ones.
One example of a fast innovator from our study is fashion re-
tailer Zara, part of the Inditex Group, the world’s largest apparel
seller. The typical fashion retailer is organized around individual
functions to gain scale and cost advantages; as a result, product
development, manufacturing and delivery take months. Zara
gets new styles to market in two-to-four weeks. To do so, it uses
a cross-functional, integrated organization to accelerate de-
cision-making and eliminate delays in functional handoffs.
rotmanmagazine.ca / 85
Fast innovators test prototypes directly with customers, focusing
on the insights they can gain from consumer feedback.
Design, procurement, manufacturing and delivery are all orga-
nized into teams that work closely with store managers to quick-
en responsiveness to shifting market trends.
Team performance is assessed on the basis of common met-
rics and incentives that focus on go-to-market speed and rapid
lead times. As the former CEO of Inditex, José Maria Castel-
lano, puts it, “This business is all about reducing response time.
In fashion, stock is like food: it goes bad quickly.”
How to do it: From an innovation perspective, there are two as-
pects to speed: the rate at which companies develop new prod-
ucts and services, and the rate at which they deliver them to mar-
ket. Some companies emphasize one or the other; for example,
innovation leaders stress development and fast followers focus
on delivery. That said, companies that have designed their sys-
tems, processes and cultures for speed in either context tend to
have four things in common. They:
APPLY LEAN PROCESSES. The lean philosophy emphasizes speed as
much as it does quality, efficiency and elimination of waste. This
year, for the first time, we asked our survey respondents to rate
their companies’ innovation and product development activities
on 12 dimensions related to lean and efficient product develop-
ment, including short cycles and iterations, standardized pro-
cesses, and the quick modeling and testing of designs. When we
segmented the responses by self-described ‘strong’ and ‘fast’ in-
novators, we found a close correlation between these two groups
— and a high degree of employment by both of lean principles
across all 12 dimensions.
PROTOTYPE TO GET CUSTOMER INPUT FAST. Many companies wait
until a new product is perfected before designing an elaborate
launch. Fast innovators test prototypes directly with customers,
worrying less about the imperfections that they know are there
and focusing more on the insights they can gain from consumer
feedback. This is incorporated quickly in the next design itera-
tion, and another prototype is developed and tested. Good in-
novation systems fail fast and fail cheap — cutting losses sooner
than a standard innovation playbook might suggest and limiting
the waste created by going too far down an unproductive path.
DEDICATE PEOPLE AND RESOURCES TO THE TASK. Experts debate the
benefits of centralized versus decentralized innovation organiza-
tions, but what’s most important is to have dedicated capacity.
If innovation is 10 per cent of 100 people’s responsibility, you
can guarantee that little of it will take place; but if it’s 100% of
86 / Rotman Management Fall 2016
10 people’s job, things will start to happen. Speed is partly born
of the priority that is placed on it, so assigning — and incentiv-
izing — a dedicated team with the job of moving fast is an es-
sential organizational move. Strong innovators create fast-track
programs, dedicated production capacity and established tool-
boxes, and typically, they are able to reduce time-to-market by
a factor of four.
SET AND FOLLOW THE RIGHT METRICS. ‘We are what we measure’,
but too often, companies measure the wrong thing. Metrics that
put the emphasis on incremental progress, or progress against a
single component of a larger whole, can cause individuals and
teams to focus on their particular ‘tree’ while losing sight of the
forest. The best-performing innovators measure and incentivize
teams on their overall achievement of company goals.
2 EMBRACE TECHNOLOGICAL PLATFORMS
In this year’s survey, ‘advances in technology platforms’ ranked
as the most important factor driving innovation, and Big-Data
analytics was not far behind. Technology-enabled innovation
comes in many flavours. It can mean using advanced analytics
to improve decision-making, employing digital technologies
to retool manufacturing, and harnessing mobile capabilities to
improve marketing, to name just a few. The crux, in all cases, is
the creation of a platform that can be leveraged repeatedly to de-
liver impact. In our experience, technology platforms can bring
benefits in at least four areas: cost and timeline reduction, often
though automation; business transformation; the enhancement
of process; and, most significant, business model innovation
through the creation of new types of products and services.
Take the example of General Electric, which used the new
technology of 3-D printing to reduce the cost of manufacturing
transducer probes — the most expensive component in its ultra-
sound equipment. This innovation resulted in both significant ef-
ficiencies and more flexible production lines, driving down costs,
which, in turn, led to uses of the technology where price had pre-
viously been prohibitive. GE is now exploring how 3-D printing
can be used in additional businesses, including jet-engine manu-
facturing.
How to do it: Companies that develop and innovate using tech-
nology platforms regard functions such as IT and analytics as
‘centres of value’ rather than of service or cost. They tend to
centralize innovation (44 per cent of both strong and disruptive
innovators use a centralized innovation model), and they make
sure to have staff 100 per cent dedicated to innovation. Their
approach features tight alignment between the business func-
tions and IT, sound system architecture, a partnership attitude
(both internally and with external resources), and, more and
more frequently, an agile style of innovation development.
One of the most difficult — and important — organizational
and cultural shifts is moving from a traditional ‘waterfall ap-
proach’ to idea development — in which stopping a project is
seen as tantamount to failure — to an agile approach that sets
as many ideas racing as possible and quickly and happily kills
off the ones that fail to show potential. Companies that make
this change also become good at taking in ideas from all kinds
of sources, including internal idea labs, external scouting,
thought-leader monitoring, vendor relationships, crowd sourc-
ing and academic partnerships.
3 LEAN INNOVATION
Creative functions such as new-product development are never
100 per cent efficient: they involve a certain amount of trial, er-
ror, and, inevitably, failure. But the fact is that some companies
are considerably more successful at R&D than others, and hav-
ing strong processes in place is one of the four attributes that
executives say is critical to success. To improve their R&D pro-
cesses, companies must:
MANAGE THE UNMANAGEABLE. It seems almost counterintuitive
that strong innovators would emphasize process. After all, R&D
is a creative function, and too much process management runs
the risk of squelching the very creativity that is the lifeblood of
innovation. The conventional wisdom is that the best creative
minds want freedom, and any sort of process management rep-
resents manacles that either drive them away or, worse, keep
them onboard but fettered from creating the value they are ca-
pable of delivering.
Yet the data is unequivocal — and compelling: in this year’s
survey, we asked respondents for the first time to rate their com-
panies’ innovation and product development activities on 12
dimensions related to lean and efficient product development
— including short cycles and iterations, standardized processes
and the quick modeling and testing of designs. The overall re-
sponses were roughly 50 to 60 per cent positive. But when we
segmented them by strong versus weak innovators, the percent-
age of strong innovators following lean principles jumped to 74
per cent or more — on every dimension. Strong innovators are
two to three times more likely to adhere to lean principles than
their weak counterparts.
The impact can be substantial. Separate BCG research has
shown that the companies that are first to master lean R&D meth-
odologies gain significant competitive advantages by developing
higher-quality products up to six months sooner than their com-
petitors, while also reducing deviations from product target costs
by more than 35 per cent. Moreover, in our experience, when
organizations apply the principles of lean-process improvement
customized for the creative process of R&D, the typical result is a
15 to 20 per cent improvement in R&D productivity.
This isn’t to say that these companies focus solely on effi-
ciency in the narrow sense of per unit cost. In R&D, being pro-
ductive is as much about being smart about which bets to make
as it is about pursuing those bets efficiently. But the best compa-
nies put a process in place that enables good decision-making as
well as good execution.
How to do it: The two-fold focus of process design — on execu-
tion as well as on decision-making — is captured by the mantra,
‘Do the work right, and do the right work.’ Do the work right is
all about the process of execution, and it involves the same prin-
ciples that are core to the lean approach in manufacturing and
other domains: eliminating waste, reducing costs, shortening
timelines, improving quality, and increasing efficiency. The best
companies have designed processes that focus on the following
aspects of execution:
• PLANNING, SCHEDULING AND APPROVAL: avoiding late or inade-
quate planning, lack of sequence in scheduling, and unclear
or overly iterative approval processes;
• STANDARDIZATION AND AUTOMATION: minimizing variation and
maximizing efficiency;
• ROLE CLARITY AND SCALABILITY: ensuring coordination and
consolidation of key functions for critical mass and the reuse
of assets and information;
• IN-HOUSE EXPERTISE: building and maintaining expertise and
properly deploying scarce resources;
• Sourcing and geographic distribution: pursuing the proper
use of outsourcing and offshoring with the right level of
oversight; and
• METRICS, MONITORING AND FEEDBACK: maintaining transpar-
ency on costs and other metrics, and actively monitoring to
drive responsive feedback loops.
It’s in doing the right work, however, that R&D departs from lean
as it applies to other domains. This is all about the process of
decision-making, and it takes on far more importance in R&D
rotmanmagazine.ca / 87
Strong innovators are two to three times more likely to adhere
to lean principles than their weaker counterparts.
because it is by nature a learning enterprise in which the free-
dom to follow untested hypotheses is critical. Companies need
to make all kinds of choices, such as which requirements to build
into the target product profile, how best to pursue development
for a given project, whether to run similar projects in sequence
or in parallel, what priority to give projects that are competing for
scarce resources, and — in the ultimate test of decision-making —
when to call it a day and terminate a failing project.
Lean methodologies in R&D are not implemented over-
night, nor is a culture that embraces lean principles and processes
created in weeks or months. Companies that want to truly trans-
form their R&D and product development programs are looking
at a journey that is likely to be measured in years. But for those
that depend on innovation for growth, and back that dependence
with budgets in the billions, the combination of cost savings and
improved efficacy make it a journey well worth taking.
4 SEEK PROFITABLE ADJACENT GROWTH
Recurring members of BCG’s annual list of the 50 most innova-
tive companies — 3M, General Electric and Procter & Gamble,
for example—have long succeeded by developing new products
in nearby markets that lead to incremental profitable growth.
Younger, tech-based innovators such as Apple, Amazon, and
Google have aggressively followed a similar strategy.
They’ve done so for good reasons. As markets mature and
competition increases, growth in the core portfolio inevitably
slows. Introducing new products means going up against en-
trenched competition, and even companies that innovate suc-
cessfully in existing markets often end up cannibalizing sales of
their own brands. Adjacencies help innovative companies open
new avenues for growth through exposure to markets in which
they benefit from 100% of the share that they achieve.
Adjacent growth is sound strategy, but there’s a hitch: it’s
difficult for most mature companies to pull off. Big companies
are often victims of their own success; they operate according to
cultures and business systems that are set up to drive growth in
the core. The key success factors for developing profitable new
products in adjacent markets are often different.
How to do it: We have identified five ways for companies to ex-
pand into adjacencies.
EXPLORE DEMAND-CENTRIC GROWTH. Even today, there are still com-
panies that view their categories, and the segments within them,
through either an industrial lens (grouping by production tech-
88 / Rotman Management Fall 2016
nology) or a demographic lens (such as Millennials compared
with Baby Boomers). Historically, this approach was understand-
able because companies often lacked the data to segment con-
sumers more precisely. But in the age of Big Data, it has become
much more feasible to think deeply about different types of con-
sumers and their motivations.
World-class innovators are moving from industry- or
demographic-based segmentation to what we call ‘demand
centric’ segmentation, which identifies the drivers of decision-
making by looking at the intersection of context (who the cus-
tomer is, how he or she thinks, and what he or she does) and
emotional or functional needs. Using richer data than was ever
available before, companies can construct a ‘demand map’ that
clusters consumer choices in a particular category into common
need bundles — or ‘demand spaces’. These spaces are usually
expressed in everyday language, such as ‘perfect for my family’
or ‘the kind of break I need’. When clearly articulated, they pro-
vide the right targets for innovation by adjacency teams.
This kind of thinking can also be applied to drive growth in
the core. For example, Hilton Hotels eschewed conventional
market research that groups people broadly by age, income and
occasion (‘leisure vs. business’ or ‘long stay vs. short stay’) in fa-
vour of asking people to describe what they want in a hotel and
when and why they want it. Based on the results, the company
was able to construct a map of ‘what really matters to consum-
ers’. It could separate the hospitality market into multiple cat-
egories — demand spaces — such as ‘cool and hip’ and ‘recharge
and refresh’, and allocate each of its brands to one or more
of them.
The results were startling. Not only did the demand-space
analysis help separate and reduce cannibalization among Hil-
ton’s nine brands; it also uncovered an opportunity to reposition
the company’s flagship brand into the ‘recharge and refresh’
space. In only a few years, demand-centric growth at Hilton
contributed to a dramatic improvement in the value of the busi-
ness. In 2013, Hilton’s private equity owner took the company
public at a 27% premium over the 2007 purchase price. It was
the largest IPO ever for a hotel operator.
CULTIVATE A NEW ORGANIZATION WITH NEW TALENT. We consistently
find that teams charged with adjacent innovation need to be or-
ganizationally separate from other innovation teams, for several
reasons. One is day-to-day reality. If adjacent teams are not sepa-
rate, they are almost inevitably pulled into core efforts, and their
budgets often get repurposed to address short-term challenges
in the core business. Another reason is that adjacent innovation
 The 50 Most Innovative Companies

1. Apple 26. Tata Motors

2. Google 27. General Electric
3. Tesla Motors 28. Facebook
4. Microsoft Corp. 29. BASF
5. Samsung 30. Siemens
requires different people with different capabilities from those
6. Toyota 31. Cisco Systems
who drive core innovation. Companies that try to use the same 7. BMW 32. Dow Chemical
people in new roles find that the adjacent teams tend to drift back 8. Gilead Sciences Company
toward core ideas and to miss adjacent opportunities. Adjacent 9. Amazon 33. Renault
innovation also requires an ‘investor’ as opposed to an ‘operator’ 10. Daimler 34. Fidelity Investments
mindset, which means populating teams with individuals with 11. Bayer 35. Volkswagen
different management outlooks, an entrepreneurial bent, and a 12. Tencent Inc. 36. Visa
longer-term focus. 13. IBM 37. DuPont
14. SoftBank 38. Hitachi
EMPLOY SEPARATE GOVERNANCE. Adjacent innovation generally re-
15. Fast Retailing Co. 39. Roche
16. Yahoo! 40. 3M
quires a senior governance team that can play a role equivalent
17. Biogen 41. NEC
to that of a private equity or venture capital investment commit-
18. The Walt Disney 42. Medtronic
tee. Its members need the breadth of vision, practical experience, Company 43. JPMorgan Chase
and organizational clout to review adjacent opportunities with an 19. Marriott International 44. Pfizer
understanding of the risks involved, the ability to make choices 20. Johnson & Johnson 45. Huawei
to narrow the funnel, and, ultimately, to allocate capital to the 21. Netflix 46. Nike
best ideas. This is quite a different set of capabilities than is typi- 22. AXA 47. BT Group
cally found in a core business’s governance body, which focuses 23. Hewlett-Packard 48. MasterCard
first on execution and may look askance at anything that is new 24. Amgen 49. Salesforce.com
or different. 25. Allianz 50. Lenovo

ADOPT AN EXPERIMENTAL APPROACH. Since adjacencies are often SOURCE: BCG GLOBAL INNOVATION SURVEY, 2015

uncharted territory and involve plenty of unknowns, failures are

likely. What’s important is to employ a low-cost, fast-fail meth-
odology that is based on a test, learn, adapt, and move on ap-
proach. Those overseeing the teams need to plan for the higher
likelihood of initial failure and design their approach according-
ly, using these early forays as learning opportunities. plan to address them. Once the internal house is in order, they
can begin to look around for attractive opportunities for incre-
BUILD THE RIGHT CULTURAL ENABLERS. If adjacency projects get mea- mental profitable growth. As our top 50 list indicates, the sky is
sured against existing norms and expectations, the effort to move the limit.
into new markets is doomed. Companies need to put in place
the necessary cultural enablers to support an adjacency inno-
vation program. These include a greater appetite for risk, given
inherently higher failure rates; recognition of the value of novel
sources of growth compared with projects evaluated on the basis
of near-term profit; and avoiding the tendency to migrate toward
developing products, services, and business systems that look ex-
actly like those in the core
Michael Ringel is a Senior
Partner and Managing Direc-
In closing tor in The Boston Consulting
As we have indicated herein, the strongest innovators draw on Group’s Boston office.
speed, lean processes and the application of technology to ex- Andrew Taylor is a Senior
Partner and Managing Director in BCG’s Chicago Office. Hadi Zablit is a
plore and grasp adjacent growth opportunities. Any company
Senior Partner and Managing Director in BCG’s Paris office. This article
thinking about adjacent growth should first determine where its was adapted from the BCG report, The Most Innovative Companies 2015: Four
gaps are vis-à-vis the four areas outlined above and develop a Factors That Differentiate Leaders, which is available for download online.

rotmanmagazine.ca / 89
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Idea Exchange

92 JEFF DYER on the five discovery skills

96 SARAH KAPLAN on two paths to creativity

100 DANIEL DEBOW on his entrepreneurial journey

103 NINA MAŽAR on harnessing ‘choice architecture’

107 KRISTINA MCELHERAN on data-driven decision making

111 CALEB DEAN on ‘whole brand’ authenticity

115 JIM DEWALD on ‘strategic entrepreneurship’

120 MARCO ANNUNZIATA on global innovation

124 FRANK SPENCER + YVETTE MONTERO SALVATICO

on how to tackle disruption
 QUESTIONS FOR Jeff Dyer, Professor, Wharton and Bringham Young, Author

Q In your research with Clayton Christensen, you distingui-

shed between two categories of entrepreneurs. Please
describe them.
The typical definition is ‘an individual who starts a new
business’, but within that definition, there are actually two

&A
categories: regular entrepreneurs and innovative entrepre-
neurs. A regular entrepreneur starts a business that is either
a franchise or an imitation of other businesses — for ex-
ample, a McDonald’s franchise or a dry cleaning business.
These people are not offering anything new or unique. In-
novative entrepreneurs, on the other hand, launch a ven-
ture that offers a unique value proposition, and it is based
upon their own idea. Only about 15 per cent of all start-ups
fit into the innovative category.
This is the group that we studied closely over an eight-
year period, in an effort to uncover the origins of innovative
— and often disruptive — business ideas. We interviewed
nearly 100 inventors of revolutionary products and services,
as well as founders and CEOs of game-changing companies
— people like Amazon’s Jeff Bezos and Intuit’s Scott Cook.
Our goal was to understand as much about these people as
possible.
The co-author of
The Innovator’s Your key finding was that innovative entrepreneurs pos-

DNA describes the sess five ‘discovery skills’. What are they?
We asked each entrepreneur to identify the moment when
increasing demand they came up with the idea for their new business or prod-
uct, and as we reflected on their answers, some patterns
for ‘entrepreneurial management’. emerged. We were able to identify five skills that distinguish
these individuals: questioning, observing, networking, ex-
Interview by Karen Christensen
perimenting and associative thinking.
In some cases, the idea came to the entrepreneur after
they asked a question, which triggered an answer for them.
Soon after Amazon.com was launched, Marc Benioff of
Salesforce.com was literally swimming with the dolphins in
Hawaii, when he asked himself, ‘Why shouldn’t all software

92 / Rotman Management Fall 2016

Five skills distinguish innovative entrepreneurs: questioning,
observing, networking, experimenting and associative thinking.
follow the Amazon model?’ That led to the original business
model for Salesforce.com.
PHOTO: GETTY IMAGES
Others were observing when it happened. Scott Cook
talked about when he saw the Apple Lisa — the first com-
puter to offer menus and a graphical user interface. He
suddenly realized that he could create accounting software
that didn’t ‘look like’ accounting software — that it could
actually look like interfaces that people were used to seeing
in the real world. That was the seed of the idea for Quick
Tax [now called Turbo Tax.]
For others, it was a conversation. Mike Lazaridus,
one of the founders of BlackBerry [now Research in
Motion] told us about the time someone described to him
how Coca-Cola vending machines were able to send wire-
less information to their warehouses, indicating when a
particular machine needed a refill. He thought, “Wouldn’t
we all love to hold something like that in our palms, and be
able to send data to others?” That was the idea that led to
the BlackBerry.
Others were out exploring and experimenting when
their idea hit. Jeff Bezos talks about the idea for Amazon
coming to him as he was surfing the Internet. One day,
he came across some data indicating that internet use
was skyrocketing. That led him to ask himself, ‘What
product could I sell using this popular new tool?’ Many
of the entrepreneurs also described how they associated
things that hadn’t been associated before. When mastered,
these five skills can enable anyone to improve their ability
to innovate.
Which of the five discovery skills is most important?
We all have our own unique style for getting new ideas, so
one isn’t necessarily better than the others. Jeff Bezos is a
fabulous experimenter, so he tends to get his ideas from ex-
perimenting; and, that’s okay. He doesn’t have to be good at
all five things. Meanwhile, people like Scott Cook are very
strong at observing. He told us, “That is my ‘go-to’ behav-
iour whenever I’m looking for new ideas: I just go out and
observe.” Others really like networking and talking to lots
Not all entrepreneurs are innovative. The average
dry-cleaner, for instance.
of different people. You just need to figure out what you’re
comfortable with, and that can be your ‘go-to’ approach.
Innovative entrepreneurs do a special kind of network-
ing: ‘idea networking’. How does it work?
Lots of people network for social reasons; they just really like
talking to people. Others do it for resources — in order to get
something done, or to get a job. But we found that when in-
novative entrepreneurs network, it isn’t for either of these
reasons: they are actually looking for ideas from people, or
seeking feedback on their own ideas. The mindset with idea
networking is, ‘I am authentically interested in hearing your
ideas and seeing what I can learn from you.’
You have found that there are three ways to experiment.
Please describe them.
The first way to experiment is to dismantle something —
whether it be a product, a process, an idea or a concept —
and then put it back together to see what you learn. If, on a
regular basis, you take apart your product or processes (or
those of a competitor) and try to put them back together, it
can trigger new ideas about how to do something better.
The second form or experimentation is the classic test-
ing an idea. Thomas Edison once said, ‘I have never failed
— I just had 10,000 ideas that didn’t work.’ He kept testing
and learning, testing and learning, over and over. So, we
advise people to launch a pilot; run an experiment; or just
rotmanmagazine.ca / 93
 As soon as a business is ready to be scaled, you need
to be working on new product and service ideas.
try something, and see what happens. The third approach
is simply to be an explorer: visit a new country, company or
environment; or learn a new skill, like Steve Jobs did when
he took Calligraphy classes (and then brought that knowl-
edge to the design of the McIntosh computer.)
Tell us a bit more about the discovery skill of association-
al thinking. How does it work?
Associational thinking is what happens as the brain tries to
synthesize and make sense of novel inputs, and it can be
triggered by any of the other four skills. For example, at one
point under-arm deodorant designers looked to ball-point
pens for their ability to let liquid flow from a source. This
skill basically helps innovators discover new directions by
making connections across seemingly-unrelated questions,
problems or ideas.
Salesforce.com founder Mark Benioff has said that his
job is ‘to create a culture of entrepreneurship’. What
does this look like?
There are two important components to it. First, a culture of
entrepreneurship supports and encourages the five discov-
ery skills. That includes encouraging people to question the
status quo, and to ask, ‘what if?’ If you can create a culture
where questioning is encouraged and supported, you will in-
crease the generation of new ideas.
It also entails having processes in place that encour-
age and support observing. That means allowing people to
observe customers, other companies or other divisions of
your company. For example, you might bring people from
other parts of the company to your department or division,
to share ideas; bring people in from outside of the compa-
ny; or send people to conferences or networking events. Fi-
nally, you can design processes that support and encourage
experimentation, so that, when someone comes up with an
idea, you can say, ‘Let’s run an experiment on that’.
The second part of building a culture of entrepreneur-
ship is, you have to have people who know how to create a
pilot or develop a prototype, so that they can test and vali-
date ideas. A lot of people come to me and say, “I have this
idea. Should I take it to market?” That’s why I wrote the
94 / Rotman Management Fall 2016
follow-up book with Nathan Furr called, The Innovator’s
Method. We looked at companies and start-ups that were
really good at figuring out which new ideas to take forward,
and doing fast and frugal experiments to test them before
launching them. We call this ‘bringing lean start-up meth-
ods into an organization’.
When you look around today, do you see enough organi-
zations embracing innovation?
There is a natural pattern in the evolution of an enterprise
that makes it very difficult for established companies to do
this. In the earliest stages of any new business, the most
important thing is to come up with a product or service that
people will pay for; and this is the stage when the five discov-
ery skills are so important.
Once you hit upon an idea that starts making traction,
you have to focus on scaling the business. What naturally
happens is, you bring in folks who are good at process and
standardization, and the organization becomes dominated
by people who are really good at execution.
We often see founders either leave or get thrown out
at this point, because they don’t have the skills required to
scale the business. What this fails to realize is that, as soon
as a business is ready to be scaled, you need to be work-
ing on new product and service ideas. In The Innovator’s
Method, we call this set of skills ‘entrepreneurial manage-
ment techniques’, and they are more and more important
these days. Most senior executives are still working hard to
deliver the next thing that should be done, given the existing
business model; entrepreneurial management involves turn-
ing that model on its head.
In terms of disruptive innovation, which industry or area
should people keep an eye on?
I would point to the Internet of Things, which brings the In-
ternet and the Cloud to anything and everything that you
can manufacture — basically making products and services
‘smart’. Home automation is an example. Say you’re at the
store, and you think you might be running out of dishwasher
detergent: imagine if you could push a button on your smart
phone and it could tell you whether you’re out of detergent
 The 5 Skills of Disruptive Innovators
Innovative entrepreneurs spend 50 per cent more of their
time on the following discovery activities than executives
with no innovation track record.
Questioning: innovators are consummate questioners
who show a passion for inquiry, and their queries frequently
challenge the status quo—as Steve Jobs did when he
asked, “Why does a computer need a fan?” They love to
ask, ‘If we tried this, what would happen?’, and are always
looking to understand how things might be changed or
disrupted. Their questions always outnumber answers in
a typical conversation, and are valued at least as highly as
answers.
Observing: Innovators are intense observers. They care-
fully watch the world around them, and their observations
help them gain insights into new ways of doing things.
Steve Jobs’ observation trip to Xerox PARC led to both the
Macintosh’s operating system and mouse as well as the
current OSX operating system.
Networking: Rather than simply doing social networking
or networking for resources, innovators actively search
for new ideas by talking to people who may offer a radically
}
Question
Observe
Network = Associate =
Experiment
— or that there is almost no ink left in your printer. Imagine,
further, that with the click of another button, these items au-
tomatically get ordered and shipped to you — so you don’t
have to lug home that heavy detergent bottle.
Another promising area involves leveraging resources
and assets that are already out there, as companies like Uber
and Airbnb have done. Uber realized that just about every-
one has two assets: cars and time; so, they leverage these
things to create a new business model for transportation.
The question for entrepreneurs is, Which assets or re-
sources could you leverage in a new business model? I think
we will see a lot more of this happening, as well as more
different view of things. For example, Apple Fellow Alan
Kay advised Jobs to go visit “two crazy guys up in San
Rafael.” The ‘crazy guys’ were Ed Catmull and Alvy Ray,
who headed a small computer graphics operation called
Industrial Light & Magic. Fascinated by their operation,
Jobs bought the company for $10 million, renamed it Pixar,
and eventually took it public for $1 billion. Had he never
chatted with Kay, the world might never have seen films
like Toy Story and Up.
Experimenting: Innovators are constantly trying out new
experiences and piloting new ideas. They visit new places,
seek new information and experiment to learn things. Jobs,
for example, sampled everything from meditation and living
in an Ashram to calligraphy.
Associating: This means putting things together that
didn’t previously occupy the same space, and this ability
to synthesize things is born out of experience with the
first four skills.
Innovate
crowd-sourcing. The fact is, if your company doesn’t have
plans to do anything new or different over the next 10 years,
you will be left behind.
Jeff Dyer is the Horace Beesley Professor of Strategy at Brigham Young
University and Professor of Strategy at the Wharton School of Busi-
ness. He is the co-author, with Clayton Christensen and Hal Gregersen,
of The Innovator’s DNA: Mastering the Five Skills of Disruptive Innovators
(HBR Press, 2011) and co-founder of iDNA, a consulting firm based on
the book’s principles, whose clients have included General Electric,
Harley Davidson, Johnson & Johnson, Intel, Medtronic and Sony. His
most recent book is The Innovator’s Method: Bringing the Lean Start-up
into Your Organization (Harvard Business Review Press, 2014).
rotmanmagazine.ca / 95
 FACULTY FOCUS Sarah Kaplan, Professor of Strategic Management, Rotman
Combining the Two
Routes to Creativity
Interview by Karen Christensen
In the realm of creativity research, there are two schools
of thought: the ‘tension’ view and the ‘foundational’ view.
Please describe them.
Most people are familiar with the ‘tension
view’ — which is commonly referred to as
‘diversity of thought’ or ‘recombination of
ideas’. The underlying concept is that new
ideas are in tension with how we currently
think. We get so embedded in one way of
thinking about the world, that it is very difficult to break out
of it. Within this view of creativity, if you want new ideas,
you should bring diverse people from different backgrounds,
brainstorm, and do some form of recombining of their ideas
to get to a breakthrough.
The second view of creativity is known as the ‘founda-
tional view’, and it suggests that, in fact, creativity isn’t so
much about recombining disparate ideas as it is about the
in-depth exploration of a particular domain. Simply put,
when you know about a topic in great depth, you can ‘see’
where the problems, inconsistencies or issues in logic are,
and that leads to ideas for breakthrough innovations.
While the first approach warns against deep knowl-
edge in one domain, the second approach says that this
96 / Rotman Management Fall 2016
can actually be a source of innovation. As researchers, we
know much more about the first approach; the second has
been largely ignored.
Which approach is most effective in today’s complex en-
vironment?
If you’re interested in breakthrough innovation — rather
than incremental change — you really need both. As indicat-
ed, people tend to focus on enabling diverse ideas, but the
research shows that if you don’t couple that with some really
in-depth knowledge, you will not achieve a breakthrough.
That might explain why so many companies are frustrated
when they take steps to innovate, but just end up with the
next incremental idea. For example, a new innovative colour
of Post-it note — instead of the next innovative way to take
notes. Unfortunately, most companies are not organized to
foster both forms of creativity.
Tell us about the ‘double-edged sword’ of recombination
that you uncovered.
In my research I found that recombination — i.e. the tension
model of creativity — is great for sorting through ideas and
coming up with the one that will have the highest economic
 Many aspects of life are simply not quantifiable,
so if you only focus on what can be quantified,
you will miss out on some important opportunities.
impact. But at the same time, it can get in the way of deep-
dive research — which you definitely need if you want break-
through ideas. So, the double-edged sword is that some-
PHOTO: GETTY IMAGES
times you need recombination and sometimes you need a
deep dive, and if you privilege one over the other, you will
not arrive at the most transformative ideas.
Describe your findings in the realm of scientific break-
throughs.
I did this research with my former student, Keyvan Vakili
(Rotman PhD ‘13), who is now an Assistant Professor at Lon-
don Business School. We analyzed scientific patents from
the U.S. Patent Office, and developed a new methodology
using Big Data methods of text analysis to look at whether
a patent represented a truly novel idea; we also tracked
whether it ended up having any economic value.
Using these two distinct measures, we were able to
show that in producing a truly breakthrough idea, the
foundational approach was the most important. We also
found that the tension method resulted in patents with the
most economic value. What that says is, you need both ap-
proaches: you need some kind of process to go in-depth, to
really understand the domain and uncover what the chal-
lenges are; and you also need the recombination process
— bringing-in different ideas and sorting through all the
potential solutions.
Is brainstorming still a valuable tool in the innovator’s
toolbox?
Yes, but my research shows that, unless you also bring deep
insights and research to the table, you’re not going to get be-
yond incremental improvements. It’s not just about who you
invite — it’s also about the process they’ve been through to
generate knowledge in advance of coming to the table.
P&G realized that it is impossible to quantify
how people do their laundry. So instead, they
closely observed their customers to gain
qualitative understanding.
I recently wrote a piece for the online blog Quartz with
Mark Leung, director of Rotman DesignWorks. We basi-
cally argued that we need more than traditional brainstorm-
ing; we need an ‘enlightened brainstorming’ process. That
means, before you start brainstorming, you have to do some
deep work to understand what the problem really is.
These days, everybody wants shortcuts. When Mark
and I work with companies, they always ask, “Can’t we
just make this a one-day thing? Why do we need weeks of
preparation? We tell them, ‘It depends: if you want a whole
bunch of incremental ideas, great — let’s just go into a
room and brainstorm; but if you want breakthrough ideas,
you need to have that deep preparation work done in ad-
vance of brainstorming’.
What does a ‘deep dive’ look like, and what is required to
achieve it?
It’s easier to picture in the scientific sphere, where you
can imagine a bunch of scientists in their lab coats doing
research, trying to understand something — for example,
rotmanmagazine.ca / 97
 The Enlightened Brainstorming Process
Problem Definition Phase
Divergent Thinking Mode STEP 1
(Creating Choices) In-depth explorations to identify
potential problems to solve.
Convergent Thinking Mode STEP 2
(Making Choices) Frame the problem to solve.
FIGURE ONE
the way a particular molecule interacts with another mol-
ecule. This can take years of research. But if you are a con-
sumer products company that needs to figure out a way to
address the pressures of digital and omni-channel retailing,
most companies get their smart people together and decide,
‘Hey, let’s create an app, or let’s do X or Y.’ What we sug-
gest is, instead, have some of those smart people go out into
the field and spend a significant amount of time with your
customers — so they understand in detail what they do with
your product, why they’re doing it, what gets in the way, and
maybe even what their fantasies are about the product ex-
perience — which they usually can’t articulate on their own.
Once this is done, you can mix these people with oth-
ers who know nothing about consumer products, but who
understand the technology in-depth. When you put them
all together in a room to have a conversation, there will
be an understanding of the limits to which an idea can be
pushed — and that’s when you have the potential to come
up with a breakthrough.
In other work, you’ve looked at the merits of mixing
qualitative (i.e. experiential and emotional) methods with
quantitative (i.e. data-driven) methods. What is the key
takeaway from this work?
In the worlds of academic research and strategic decision-
making, we tend to like numbers. A lot. We have an ethos
in the Western world that numbers symbolize objectivity —
that they don’t lie. Today, we have the ability quantify the
world as never before, and that is very helpful. But many
98 / Rotman Management Fall 2016
Problem Solving Phase
STEP 3
Explore ideas from different
perspectives to expand the scope
of possibilities.
STEP 4
Select which ideas not to pursue
and which are worth testing.
things in life are simply not quantifiable, so if you only fo-
cus your decision-making on things you can quantify, you
will miss some really important opportunities.
Both in scholarly research and in management deci-
sion-making, we need to be sensitive to the fact that some
things cannot be quantified. In market research, everyone
used to just run big quantitative ‘conjoint studies’ based on
surveys, to figure out consumer behaviour. Then, Procter &
Gamble decided to just hang out and watch actual people
do actual laundry, because they realized that there is noth-
ing you can quantify about how people do their laundry:
you need to observe, see when the detergent spills, how
much people use, how they get the laundry in and out of the
machine — and none of that is quantifiable. Research proves
how important such ethnographic insights are.
Don’t get me wrong — we really can’t do without the
quantitative. But today, we should also be paying attention
to qualitative insights. These are two different lenses for
seeing the world, and together, they lead to more distinc-
tive strategies.
You have been developing recommendations for design-
ing an innovation process within organizations. Can you
summarize them so far?
First of all, leaders need to consider how to incorporate
both problem-finding and problem-solving in their orga-
nization. They also need to ensure that there is both di-
vergent and convergent thinking going on. You need mo-
ments of divergence, where you’re exploring and you
don’t really know what you might find; and you also need
moments of convergence, because, eventually, you will
have to make decisions, and that happens both in the prob-
lem-finding stage and in the problem-solving stage.
Mark and I have come up with a matrix, a two-by-
two graphic that shows how to approach this (see Figure
One). There are different activities to do in each of the
quadrants. Most people are much more comfortable in the
convergent phase than the divergent phase, because when
you are diverging, you are allowing yourself to not know
something and to be open-ended — and that is uncomfort-
able for most business people, who have not been trained
to do this.
Similarly, people naturally tend to want to spend more
time problem-solving than problem-finding, and that has to
change, because unless you identify the right problem to
solve, you will not get very far. This is where the founda-
tional view of creativity and divergent thinking come in.
You need some space to come up with the right questions
before you apply all of your energies to answering them.
In strategic management, we all know that in order
to gain a competitive advantage, you need to have a dis-
tinctive offering. The fact is, you’re never going to get to
a distinctive competitive advantage if you’re stuck in the
convergence and problem-solving quadrants.
Sarah Kaplan is a Professor of Strategic Management at the Rotman
School of Management. She is co-author of Creative Destruction: Why
Companies That Are Built to Last Underperform the Market — And How
to Successfully Transform Them (Crown Business, 2oo1).
Rotman faculty research is ranked #3 globally by the Financial Times.

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 QUESTIONS FOR Daniel Debow (Rotman JD/MBA ’00), Former Executive, Workbrain, Rypple and Salesforce.com

Q
&A
When did you first realize you had what it takes to be an
entrepreneur?
I don’t know that I ever had that inkling. I just sort of looked
around and saw entrepreneurs succeeding, and figured I
might have a chance. I never had a lemonade stand when
I was a kid, but when I was in high school and university,
I was always organizing things; rock concerts, fraternity par-
ties, radio shows. I loved the idea of creating something out
of nothing, and having people enjoy it.
I only realized that I preferred a more entrepreneur-
ial work environment during my summer job at Goldman
Sachs, when I was a graduate student. It became clear
pretty quickly that the classic corporate environment prob-
A serial entrepreneur ably wasn’t for me. Soon after that, I connected with David
in-the-making describes Ossip, and he gave me an opportunity to work with him on
starting up his company, Workbrain. I actually co-wrote
his passion for pushing the original business plan with Matt Chapman (Rotman
the envelope and the JD/MBA ‘00) while I was still in business school. It was ex-
tremely fulfilling to be part of creating a brand new com-
opportunities that excite him most. pany; I was hooked.
Interview by Karen Christensen
Workbrain grew much more quickly than expected. What
were the key challenges you faced?
For the record, I was a founding member and executive at
Workbrain, but it was David’s company. To your question,
the biggest challenge we faced due to rapid growth was
related to people: finding good talent who could deal with

100 / Rotman Management Fall 2016

 There is a basic misunderstanding that as an entrepreneur,
you just show up at a pitch meeting, describe your plan — and
someone will write you a cheque.
the ambiguity and hectic pace of scaling up at an amazing
rate. There is plenty of raw talent in Toronto, but at the time,
it was not easy to find people who had experience scaling
a start-up. I spent a lot of my time on this, as we grew the
business.
Then, of course, there were all the random, crazy things
that happen when you’re starting a company. We thought
our first segment would be airlines, and we were all set to
announce that on the morning of September 11, 2001. Clear-
ly, that was not the day to announce a new airline-focused
business. Then a couple of years later, SARS affected our
business. These macro events — which really didn’t have
anything to do with me — ended up influencing me a lot.
I learned to be really resilient and to just roll with things.
Describe your efforts to move the lean-startup approach
beyond the manufacturing floor, to the realm of human
capital, with Rypple.
I had learned about lean during my [Rotman] MBA pro-
gram, and when I went to work with David, I read a lot about
‘agile software development’, which was really the same
principle, with roots in how you treat people. When Taiichi
Ohno wrote about the Toyota production process, he was
really talking about a philosophy of people management:
it was about giving people information, autonomy and a
compass. He found that letting people solve problems — by
giving them data and feedback in real time about production
problems, along with the autonomy to learn and decide —
enables continuous improvement.
When David Stein, George Babu and I were working
on the idea for Rypple, we knew that the performance-
management process was fundamentally broken, and that it
was very ‘un-lean’. A manager might have some important
feedback to give a particular worker, but she had to wait until
the end of the year to do anything about it. That doesn’t help
anybody; it’s sort of analogous to ‘inventory getting stale’
— which is the opposite of Kaizen and continuous improve-
ment. We thought, wouldn’t it be great to live in a world of
continuous feedback?
I became friendly with Eric Reis, the founder of ‘lean
startup thinking’, and he became an advisor to Rypple. We
asked ourselves, how could we apply these philosophies to
managing people? Then it came to us: by giving them feed-
back quickly, and giving them the power to solve problems.
With the lean approach, you fundamentally trust your em-
ployees to do the right thing — because you believe that they
want to do what’s right for the company.
Traditional performance management systems have
been very compliance-driven and ‘legalistic’. The attitude
is, ‘Always document everything, or we won’t be able to fire
this person later on’. What if, instead, the focus was clearly
placed on improving human behaviour? That’s how Rypple
came about.
Salesforce bought Rypple in 2012. How did this come to
be?
One of their board members was an early investor, and then
one of their writers started helping us with our communica-
tions. Soon after, we tried to make them a customer. And
then, totally independently, one of their business develop-
ment people reached out to us about investing. As we went
through the process of having them become a strategic in-
vestor, ultimately, they got to know our team. They talked to
our customers — including Facebook and LinkedIn — and
heard good things, and CEO Marc Benioff decided that he
wanted to acquire the business. As the saying goes, he made
us an offer we couldn’t refuse.
After Rypple was acquired by Salesforce, you went to
work for them. Describe your work there.
For the first few years, I was focused on integrating the com-
pany with Rypple — transforming it into Work.com and re-
positioning it as a sales-performance tool. Then I took on a
new challenge. Marc has incredible foresight, and he knew
before most people that wearables were coming, and that
they would have a huge impact. So he got me to build Sales-
force Wear, which allowed developers to use the Salesforce
platform to build wearable apps and come up with all sorts of
stuff. We had dozens and dozens of companies — probably
hundreds now — building wearable apps.
You have made an analogy between ‘courting’ investors
and dating. Please explain.
I think there is a basic misunderstanding that as an entrepre-
neur, you just show up at a pitch meeting, describe your plan
— and someone will write you a cheque. To me, that’s sort
of like going on a first date and proposing marriage at the
end of the night. In reality, both things — dating and finding
rotmanmagazine.ca / 101
 There are literally tons of opportunities out there to look
at the way the world is and ask, What could be?
investors — are about building trust and affinity over time.
The fact is, investors are always trying to figure out, “Can we
trust this entrepreneur?” If you don’t have a track record to
point to, that will not happen instantly.
What is the biggest risk you’ve ever taken, and how did
you approach it?
It’s funny: there is this great narrative of entrepreneurs as
super risk-takers; but I don’t think that’s necessarily true. Of
course, there are the Elon Musk’s of the world, but most
entrepreneurs actually become excellent risk ‘understand-
ers’, identifiers and hedgers. When I accepted the offer to
join Workbrain, I also had in my hand an offer from the
Boston Consulting Group. If it didn’t work out, I could
go back to BCG, so there was little risk involved in that de-
cision. It’s true that I started Rypple with David Stein after
Workbrain, and there was definitely some risk there. But be-
cause we had already had some success, we knew we’d be
getting offers at that point, so it wasn’t like we were betting
our family’s future.
Actually, the biggest risk I ever took was after complet-
ing my undergraduate degree: I accepted a job with my col-
lege fraternity, travelling around the United States for a year
and opening up fraternity chapters and being a leadership
consultant for them. I had very little supervision — I was ba-
sically given a credit card and a rough sense of ‘here are the
universities you should go to. Just check in every few days’.
This was before mobile phones and laptops, so I would of-
ten call in from a pay phone. That was an interesting risk be-
cause I didn’t know what my future was going to be. But it
turned out to be an amazing learning experience.
People become so fixated on their career path that they
don’t understand that in reality, it’s more like a ‘career stum-
ble’. When you see an interesting opportunity, you have to be
prepared to seize it. I never had a masterplan.
You were named Canada’s Angel Investor of the Year in
2015. Of all the companies you’ve invested in, which are
you most excited about?
That’s like asking a parent which of their children is the fa-
vourite — but here’s what I would say: despite the stereo-
types, there are some Canadian companies whose ambition
is humongous. The problems they’re trying to tackle are
genuinely large and complex, and they’re using the latest
102 / Rotman Management Fall 2016
technologies to tackle them. These are the companies that
are really exciting and interesting to me. I love to see peo-
ple pushing the envelope. These tend to be companies that
involve next generation user-interface — like Thalmic
Labs, where I’m on the board — and companies that are
using machine learning, robotics and artificial intelligence.
Usually, there is a one-in-100 chance they will succeed, but
if they’re right, these will be multi-billion dollar, world-
changing companies.
What can you tell us about your latest Venture, ‘NewCo’?
Not much at the moment. All of these things start off as
‘learning journeys’, so I’m in the process of learning right
now. I will say there are some really amazing shifts happen-
ing in machine learning and the way people communicate
at work, and this is creating opportunities to completely
rethink things that previously looked pretty mundane. As
I indicated earlier, when we started out, people thought a
performance review was a performance review — that you
could never change the way it is done. Then came Rypple.
There are literally tons of opportunities out there to look
at the way the world is now and ask, What could be? I can
tell you that we are studying some of the most basic prob-
lems people face all the time — but that’s about all I can say
for now!
Daniel Debow (Rotman JD/MBA ‘00) is the former senior vice president
of salesforce.com’s emerging technologies. He was the co-founder
and CEO of Rypple, which was acquired by salesforce.com in 2011 and
rebranded as Salesforce Work.com. Daniel was on the founding team of
Workbrain, a workforce management software company, and led Work-
brain’s sale to Infor in 2007. He holds a JD/MBA from the University
of Toronto and an LLM in Law, Science and Technology from Stanford
University. He lives in Toronto with his wife and three kids.
FACULTY FOCUS Nina Mažar, Associate Professor of Marketing, Rotman
How ‘Choice
Architecture’
Changes Behaviour
IT WOULD BE IMPOSSIBLE to inventory all of
the useful transactions people conduct
on the Internet every day. In 2014 alone,
e-retailers based in the United States
sold more than $300 billion of merchan-
dise, according to the U.S. Department
of Commerce. But valuable online activity includes much
more than shopping: most U.S. colleges and universities
offer online courses and people commonly publish books,
raise money for deserving charities, and even find life part-
ners online.
Governments, however, have not been as successful
at convincing citizens to access public services online. In
Ontario, the provincial government has made more than
40 services available online, including address changes,
driver’s license and health card renewals, and copy requests
for various records such as birth and marriage certificates.
Expanding citizens’ use of just one of these online service —
the annual or biennial renewal of automobile license plates
— could potentially save millions of dollars.
Since 2010, Ontarians have been able to go online to
renew the stickers that display when their license plate fees
expire. But as of 2013, only 10 per cent of these transactions
were conducted digitally. Servicing the remaining 90 per
cent of renewals in-person cost over $35 million that year.
Efforts to address such discrepancies can benefit from in-
sights produced by researchers in the field of behavioural
science, who develop and test methods that help people
accomplish behavioural change. Beginning in 2013, my col-
leagues and I applied our expertise in a first-of-its-kind col-
laboration between Ontario’s Behavioural Insights Unit
(BIU) and the Behavioural Economics in Action Research
Centre at the Rotman School of Management (BEAR). The
results were promising: not only did we increase online
sticker renewals in Ontario, but there is also evidence that
our interventions increased the number of on-time renew-
als. These findings suggest that no-cost interventions such
as those we tested can save money and help citizens in ways
beyond providing convenience: by renewing their stickers
on time, vehicle owners avoid incurring citations and fines.
At the same time, police forces potentially gain time to focus
on more pressing enforcement matters.
Generally speaking, when it comes to acting on our
good intentions, we face major challenges. People who plan
to save often put away less money than they need later, for
example; and those who fully believe in the importance of
a good cause end up not donating to that cause. To help us
act on our good intentions, governments are increasingly
applying behavioural science insights.
One of the most successful approaches to helping peo-
ple act on their intentions is to carefully design the choice
architecture — that is, the way in which options are present-
ed or preferences are elicited — in ways that ‘nudge’ people
to make desirable decisions while preserving their free-
dom of choice. Research shows that people tend to view
outcomes in terms of losses and gains relative to context-
dependent reference points — such as when they compare an
existing investment portfolio’s worth with its maximum
rotmanmagazine.ca / 103
 One of the most successful approaches to helping people act on
their good intentions is to carefully design the choice architecture.
Figure One. Original messaging on the license plate
sticker renewal envelope (our ‘control condition’.)
and minimum potential value. What is more, people are
about twice as sensitive to differences framed as losses
compared with the same differences framed as gains — a
phenomenon known as loss aversion.
Partially due to loss aversion, the default option among
a group of presented options tends to be ‘sticky’. People are
reluctant to give up a default because the losses inherent in
doing so often (subjectively) outweigh the relative gains of
alternative options. Accordingly, defaults exert a strong in-
fluence on choices — even those as consequential as wheth-
er to become an organ donor or whether to enroll in a 401(k)
retirement savings plan.
Choice architecture interventions make use of such
insights to help people make better decisions. For instance,
informing people that ‘the majority of citizens pay their
taxes on time’ (i.e. communicating a social norm) led to a 15
per cent increase in the percentage of British citizens who
paid their overdue taxes in 2011 and 2012. During a 23-day
experiment involving just 100,000 taxpayers, this resulted
in an additional £9 million in government revenue. It has
been estimated that this intervention could bring in approx-
imately £160 million at very low cost when implemented
countrywide.
In another field experiment, 6,824 insurance policy
holders in the U.S. were asked to endorse the statement, “I
promise that the information I am providing is true” with
their signature at the top rather than at the bottom of an au-
dit form self-reporting their cars’ odometer mileage. This
‘pre-commitment to truthfulness’ significantly reduced the
extent of dishonest self-reports — resulting in an estimated
additional $1 million in insurance premium revenue over
a 24-month period. Even subtle cues in a physical environ-
104 / Rotman Management Fall 2016
ment, such as queue guides and area carpets, can create the
feeling that it is almost one’s turn and therefore increase the
likelihood that consumers will stay in line rather than leave
the queue.
In our own field experiment, my colleagues and I at-
tempted to nudge more citizens of Ontario to renew their
license plate stickers online rather than doing so in-person
at Service Ontario centres. These stickers must be attached
to vehicle license plates to show that owners have paid the
required fees. Vehicle owners can choose to renew for one
or two years, with no discount for renewing for two. The fees
are the same for renewing online or in-person.
Using insights from two areas of behavioural science
research, we tested three interventions. One body of work
demonstrates the importance of salience — the degree to
which something grabs a person’s attention; while the other
focuses on effects from framing situations or messages in
terms that acknowledge losses versus gains.
The goal of our first intervention was to increase the
salience of information regarding the online renewal option
that citizens saw in the subject line on the mailing envelope
carrying the sticker renewal form. Motivated by the knowl-
edge that when some information is emphasized more than
other information in a communication, the emphasized
content will have greater impact on people’s judgments, we
made two adjustments (see Figure Two): first, we embed-
ded the black text of the subject line in a blue background to
make it stand out on the exterior of an otherwise standard
black-and-white pressure-sealed envelope. Second, to in-
crease the salience of benefits from online renewal, in the
subject line we used the wording ‘Instant and easy renewal
online’ rather than ‘Renew online and receive a 10-day ex-
tension.’ Our reasoning was that not all consumers require
a 10-day extension. Further, because renewing license plate
stickers online might seem complex and daunting to people
inexperienced with the procedure, focusing on its benefits
could help ease people into trying an unfamiliar process.
Research has shown that when people think about an
immediate action, they often primarily focus on hassles or
the mental effort required to perform the action, instead of
the benefits. For example, when deciding whether to adopt
a new technology such as a smart watch, consumers are
often predisposed to think first about the learning costs
(time, for instance) associated with new tools. Because of a
well-documented process known as output interference, this
Figure Two. Salience messaging on the license
plate sticker renewal envelope (treatment conditions
1, 2, and 3).

Figure Three. Standard messaging on the back

of the license plate sticker renewal form (control
condition and treatment condition 1).

can inhibit the consideration of potential benefits. In other

words, the consideration of unwelcome factors interferes
with the effective consideration of any subsequent factors.
In light of these insights, we also changed the original
messaging (see Figure Three) about the online renewal op-
tion printed on the back of the renewal form found inside
the pressure-sealed envelope. Specifically, we designed our
second and third interventions to emphasize the consumer
benefits in more detail. Our goal was to prompt consider-
ation of the benefits before a person had time to think about
any hassles or costs associated with undertaking an unfamil-
iar process.
We framed the benefits of renewing online in two ways.
Figure Four. Gain messaging on the back of the license
In our second intervention, we directed people’s attention plate sticker renewal form (treatment condition 2).
to the gains or positives associated with the online renewal In this mailing the words renewing online! and
(see Figure Four). In our third intervention, we applied one the website address were printed in red, in English
of the most robust findings in the behavioural science liter- and in French.
ature: that people are more averse to potential losses than
they are attracted to equivalent potential gains. Here we
highlighted the negatives, particularly the time cost, of not
choosing to renew online (see Figure Five). In addition, in
both of these framing interventions on the back of the form,
we also used colour to try to heighten the salience of parts
of the gain and loss messages by printing some text in red
instead of black.

Testing Our Interventions

In our study, 626,212 owners of registered vehicles in Ontar-
io received one of four different versions of a sticker renewal
letter over eight weeks, from December 2013 to February
2014. In the control condition, owners received the provin-
Figure Five. Loss messaging on the back of the license
cial government’s standard renewal letter (see Figure One plate sticker renewal form (treatment condition 3).
and Figure Three). The rest received envelopes with the In this mailing the words renewing online, the
colour and text modifications described above (see Figure 10-minute time estimate and the website address
Two), as well as one of three different messages inside. were printed in red in English and in French.
What we call the salience-only condition (with the enve-
lope altered, but nothing else) featured the same message
inside the envelope as the existing, standard renewal letter

rotmanmagazine.ca / 105
 (see Figure Three). The salience-gain condition featured
the gain-frame messaging and colour modifications inside
the envelope emphasizing the gains of renewing online
(see Figure Four). And the salience-loss condition featured
the loss-frame messaging and colour modifications inside
the envelope stressing the cost of not renewing online (see
Figure Five).
We altered which version of the renewal letter was
mailed to vehicle owners each week. Ninety days before
each vehicle owner’s date of birth — when license plate
stickers expire — Service Ontario mails out renewal forms.
As a consequence, vehicle owners’ assignment to one of
our four conditions depended on their license plate sticker
expiration date. Although complete randomization of as-
signment to condition would have been ideal, system limi-
tations involved with printing and tracking hundreds of
thousands of renewal forms mandated this approach.
Each condition was run two times for one-week pe-
riods, with four weeks between the periods. Our primary
measure of success was the percentage of vehicle owners
who renewed online. We also measured the percentage of
vehicle owners in our sample who renewed on time. The
result: each of our three treatment conditions increased
online renewals in comparison to the standard letter. The
salience-gain treatment condition achieved the largest rel-
ative increase of 42.7% (increasing from 10.3% to 14.7%).
The increased use of the online renewal service during
our eight-week experimental period saved the government
approximately $28,000 in transaction fees by reducing the
number of in-person transactions in Service Ontario cen-
tres, which are paid according to the number of transac-
tions processed. This estimate also takes into account mar-
ginal costs for the online service associated with meeting
an increase in demand of this magnitude. We project that
if the best-performing salience-gain treatment condition is
adopted permanently, approximately $612,000 would be
saved annually, and this gain would be achieved at virtually
zero cost to the government.
Our results add to the growing number of demonstra-
tions of how simple and often cost-free interventions rooted
in behavioural science research can be applied to help peo-
ple make better decisions, without resorting to financial in-
centives or restricting freedom of choice.
106 / Rotman Management Fall 2016
Key Takeaways
Through this study, we learned several practical lessons that
may be of use to others working to apply behavioural science
insights to their work:
• A behavioural insights–driven philosophy can help an
organization better understand the people it serves.
• Outcomes that benefit people can lead to better out-
comes for organizations.
• A thorough application of behavioural insights requires
a research team with strong policy and program knowl-
edge, an understanding of government, and support
from academics with both theoretical and experimental
expertise.
• Researchers need allies to explore the promise of be-
havioural insights to improve policy. Organized out-
reach, education, and support from senior leadership,
and early adopters are all needed.
This project has served to strengthen our confidence that
applying behavioural principles can produce measurable
and positive outcomes at a low cost.
Nina Mažar is an Associate Professor of Marketing and Co-Director
of the Behavioural Economics in Action Research Centre (BEAR)
at the Rotman School of Management. Named one of the 40 Most
Outstanding B-School Profs Under 40 In The World by Poets & Quants,
she is on leave in 2015-16 to serve as the Senior Behavioural Scientist
of the World Bank’s Global Insights Initiative in Washington, DC.
This article is adapted from her paper, written with Rotman professors
Claire Tsai and Min Zhao, and Noah Castelo, Elizabeth Hardy and
Julian House, and published in Behavioural Science and Policy. This
research was supported by a TD Bank Group Research Fund awarded
to BEAR.
Rotman faculty research is ranked #3 globally by the Financial Times.
FACULTY FOCUS Kristina McElheran, Assistant Professor of Strategic Management, Rotman
Data-Driven
Decision Making:
Closing the Skills Gap
Interview by Karen Christensen
Digital platforms and tools continue to transform daily
operations within firms. Talk a bit about the challenges
this is creating for managers.
These new technologies require analyti-
cal tools and frameworks, familiarity with
data, and an ability to put data, market re-
quirements, and firm strategy together to
form insights. For most people, this is very
new; and it’s also new for the people they
work with and manage. As a result, there is a huge skills gap
at many different levels within firms.
Going from data to a managerial insight is actually quite
complex. Data is messy, the world it represents is complex,
and both training and effort are necessary to arrive at sound
interpretations. The problem is that many managers avoid
complexity, almost instinctively: they’re busy, they have
information overload, and they want to keep things simple.
I have a lot of sympathy for that. Simple truths can be very
powerful, and it can often be time- and cost-efficient to
focus on simple explanations and decision-rules. Unfortu-
nately, though, complexity is only increasing, and it must
be grappled with. This takes time, investment in both hiring
and retooling talented workers, and important changes in
how daily decisions are made within firms. Unfortunately,
this is generating a lot of anxiety and insecurity — which can
make people resistant to change.
This comes as no surprise. In Trust in Numbers, Theo-
dore Porter takes a philosophical and sociological look at
the role of data in society, noting an interesting interaction
between data and authority: when access to objective data
is limited, we rely on peoples’ seniority and experience to
determine and justify what needs to get done. Suddenly
having reams of objective data can undermine the power
of high-status people and create conflict in organizations.
It also places heavy burdens on the data-users and analysts
to be accurate and to communicate effectively. Becoming
data-driven is not something that happens overnight.
When the skills gap is closed and everything else comes
together, what does a ‘data-driven organization’ look like?
The essential consideration for every organization is to
make sure that the data they are collecting actually address
the core challenges they are trying to solve. Firm strategy
and objectives should drive the entire process: from data
rotmanmagazine.ca / 107
 Strategy should drive the entire process: from data
collection, to analysis interpretation and communication —
not the other way around.
collection, to analysis, interpretation and communication —
not the other way around. As our daily lives become more
digital, people are generating all kinds of ‘digital exhaust’
— data that is accessible and can easily be looked at. The
question becomes, should we be looking at it? Is it the right
data? As data grows more and more ubiquitous, it is going
to become ever more important for organizations to have a
strong process in place for collecting and analyzing it. Sim-
ply combing through whatever data comes easily to hand,
fishing for insights, is not going to work. It is essential to step
back and lead with the questions; and then, not be data-driv-
en, but truth-driven.
In his work on data-driven decision making, former
Harvard professor Gary Loveman points to the importance
of using data to get to the truth by setting up our questions in
such a way that we can test them with data — so that we’re
not just following whatever falls out of some analytic model
or algorithm, but that everything comes back to an underly-
ing truth that is important for the firm. Ultimately, data nev-
er ‘speak for themselves’ — they must always come through
a human interpreter.
In your research, you found that the collection and use of
data in firms is linked to performance. How so?
We were able to use U.S. Census Bureau data on roughly
35,000 plants that were carefully selected to represent the
entire American manufacturing sector. The differences
among plant managers in how they used data surprised
me; a large number of them said they don’t feel they have
enough data, or that the data isn’t driving — or even inform-
ing — their decisions. It was interesting to see how many are
still quite far behind the frontier.
This should probably not be too surprising. We know
from studying other new technologies that adoption takes
time. Among other things, it requires learning, and we found
that the organizations that are focused on learning about
the latest management practices in general were also more
108 / Rotman Management Fall 2016
likely to adopt robust data practices. At the same time, we
found that those who use data intensively — alongside other
good practices and investments in information technology
— had significantly higher productivity than similar organi-
zations. Given the extent of this relationship, I expect many
firms will learn about this quite quickly and make changes to
their practices.
To get a sense of how big a deal this is, consider that
adopting data-centric practices was associated with roughly
the same productivity improvements as making very large
tangible investments in information technology. In the man-
ufacturing realm, even very small productivity improve-
ments can be a really big deal. We were able to confirm that
there is definitely something to this ‘data craze’. Future re-
search will be aimed at tracking this transformation and how
it relates to firm performance moving forward.
You also found that the decision-making environment
at a firm plays a role in the effectiveness of data-driven
decision making (DDD). Please explain.
We’re still digging into this, but what we found surprised us:
in general, we noted a change over the five years in our data
set, in terms of how daily tasks are organized in these man-
ufacturing plants. The overall trend is definitely towards
more collaborative decision-making between managers and
front-line workers; and yet, for organizations that embrace
these practices, the benefits of being data-focused evapo-
rated. So, it might be the case that, in firms where there is
a good deal of autonomy for front-line workers, embracing
data-driven decision making is not as important as it is in a
more traditional manufacturing setting.
My sense is that this is related to the broader context
in which the data-driven practices are deployed. A firm’s
culture is not something we can pin down easily in our
data, but we believe it matters. When firms give workers a
lot of latitude and rely less on standardized processes, data
collection and use may not be a silver bullet for improving

productivity. Data collection typically works best in stan-
dardized environments. These differences in how — or
whether — firms benefits from data-driven practices make
sense to me. If this approach worked equally for all firms,
everyone would do it — and no one would gain an advan-
tage. Being data-driven is not a panacea: it is just a poten-
tially powerful tool — one that may work better for certain
firms or in certain situations.
Based on my prior research, I suspect that an important
determining factor is how much firms are able to change
their processes and culture to accommodate a greater focus
on data and analytics. It may come down to whether DDD
is a small change for the firm or a major process innovation.
How do you define process innovation? Can you provide
an example?
Business processes are the set of activities that a firm en-
gages in to bring its product or service to customers. Some
of my research has focused on how firms buy and sell goods,
and how the Internet radically changed this process for
many firms.
Take the example of purchasing office supplies. Firms
lose lots of money when employees make lots of small pur-
chases of paper, pens, folders, etc. on their own. Consolidat-
ing the purchases into larger batches — and even requiring
that formal purchase orders get faxed to pre-approved ven-
dors — can be a significant process improvement. But this
is not really an innovation. A business process innovation
is a major overhaul that can disrupt daily business flows,
creating uncertainty and risk for the firm. To return to the
example of ordering supplies, moving the entire process to
an online platform that links to a range of digital catalogs,
aggregates orders, electronically executes payment, and
provides visibility to shipment requires a bigger change. It
relies on new information flows, new worker responsibili-
ties, new technology, new skills, and can reveal new failure
points. This is what constitutes a true business process in-
Guiding Principles for Embracing
Data-Driven Decision Making
Six guiding principles that run through the experiences
of senior leaders who have wrestled with the challenge:
1. Analytics should start with the business question.
2. Analytics requires skilled interpreters and
communicators.
3. Analytics is only useful if it informs action.
4. Data doesn’t have to be big to be useful.
5. Analytics depends on an evidence-driven firm culture.
6. Top leadership has to establish accountability
for data use and governance.
novation. It generates greater risks, but typically also pro-
vides greater benefits.
Your research suggests that not all firms should embrace
business process innovation.
Large firms can be the greatest beneficiaries of these big
changes, but it is very difficult to predict ahead of time
whether a particular innovation is going to be better for the
firm undertaking it, or for its competitors. That’s because
attackers in a market have nothing to lose. They can adopt
the ‘latest and greatest’ processes, or customize something
without having to change existing ways of doing business.
Typically, larger firms are less nimble and have more to lose.
So, there is this real tension and trade-off involved.
To return to the purchasing example, large firms save
the most money from moving their procurement activities
online. At the same time, it may be harder for them to replace
their existing process flow. In fact, I found that the trade-offs
came out differently for different types of processes. Pur-
chasing inputs (of more than office supplies) turned out to
be readily embraced by large, leading firms. The change in-
volved was not as costly as the benefits it provided. On the
other hand, selling final goods over the Internet was another
matter entirely. Leaders were far less willing to jump on the
e-selling bandwagon.
Why was that? What was different about E-selling?
The difference was that e-buying was not very disruptive for
either the adopting firm or its business partners; but e-selling
had a significant impact on customers. What I learned in my
rotmanmagazine.ca / 109
 research was that, any time you start to innovate within a
business’s ‘ecosystem’, you have to think about how all the
other actors involved may have to change what they do. And,
when a big firm asks its customers — potentially many — to
change their behaviour and/or technology, that can get re-
ally hard. If customers aren’t ready for the new technology
on their own terms, this can prevent connected firms from
adopting it, as well. Powerful industrial customers that were
not tech-savvy created a hurdle to the uptake of e-selling.
More generally, you really have to take a systems view
and keep in mind that certain changes might pose problems
for other actors in the value chain. If those firms also have
power, this will slow down innovation by other ecosystem
players. Quite simply, if the customer is not technological-
ly savvy, it’s going to hold back the entire value chain from
using new technology efficiently.
lenges, both at work and in the social sphere. It has been very
rewarding to participate in the stream devoted to how IT and
data can be a force for good in firms.
It is not a given that the current ‘data craze’ is a positive
development for all concerned. The fact is, there is always
adjustment when new technologies come into play. Aca-
demics can sit in their ivory towers and talk about the ‘fric-
tion’ involved in adapting to technological change; but on a
daily basis, friction means that people are losing their jobs,
firms are wasting resources, and these losses can build on
themselves to create devastating long-term effects. Our goal
is to help reduce some of this friction by applying creative
thinking and evidence-based analysis to the challenges we
are all facing in the digital age.

Tell us a bit about your work with the MIT Initiative on the
Digital Economy (IDE).
This is a group that got together under the leadership of MIT
Professor Erik Brynjolfsson, who is an influential thinker
in the realm of IT and digital transformation. There are
many challenges coming at us with respect to digital tech-
nologies, and we can’t just sit back and let it happen. Those
of us affiliated with the IDE feel that we all must embrace the
challenges of our time, which includes thinking about how
best to educate people and build institutions that are adap-
tive and robust to the technological transformations we are
experiencing. We have to ensure we have social policies that
make the technology work for us and construct a society that
we all want to be a part of — where people have jobs that are
useful and meaningful to them, even as ‘brilliant machines’
are increasingly capable of doing that work for us.
This group [which also includes Rotman Professor Kristina McElheran is an Assistant Professor of Strategic Management
at the Rotman School of Management and a Digital Fellow at MIT’s
Joshua Gans] is using the tools we have at our disposal to Initiative on the Digital Economy.
engage with government, social policy makers, and other
thought leaders to grapple with these digitally-driven chal- Rotman faculty research is ranked #3 globally by the Financial Times.

110 / Rotman Management Fall 2016

POINT OF VIEW Caleb Dean, Design Thinker and Consultant
The Quest for
‘Whole-Brand’
Authenticity
IN A WORLD WHERE INDUSTRIES are being
disrupted left and right, having a strong
brand is no longer enough to compete.
These days, companies must design their
internal experience to authentically em-
body their external image.
That’s because, with greater access to information
about how a company operates, why it claims to exist, and
who works for it, the ability of any stakeholder to gauge
brand authenticity — and inauthenticity — continues to
grow. Take the example of Comcast, which, ironically, is in
the business of connectivity — yet there are countless docu-
mented cases of customers having an extremely painful ex-
perience when they attempt to connect with an actual person
at the company. In short, connection is being sold external-
ly, but the brand is not being embodied internally.
How does this happen? One reason is that most compa-
nies put far too much emphasis on the external experience
of their brand, and far too little on how their intended brand
is experienced by their own employees and other internal
stakeholders. In his book, Zag, author and brand expert
Marty Neumeier defines brand as, ‘a person’s gut feeling
about a product, service or company’. This is an important
framework when considering brand authenticity, as it im-
plies that a brand is a personal experience that exists within
each individual who interacts with an organization — both
internally and externally.
How many times have you heard someone say, ‘Com-
pany Z makes an amazing product — but I hear it’s a terrible
place to work’, or ‘I hear they treat their vendors horribly’?
What is your gut reaction if you hear something like this
about a company, more than once? Given the negativity bias
— whereby things of a negative nature have a far greater ef-
fect on our psyche than do neutral or positive things — it is
very likely to stick with you.
I recently connected with the owners of a waste-man-
agement company, who had come to a critical realization:
their employees who drive the trucks — and are out engaging
rotmanmagazine.ca / 111
 Companies must design their internal experience
to authentically embody their external image.
with the community daily — are critical brand ambassadors.
In fact, among the entire workforce, these drivers have
the highest frequency of interactions with external stake-
holders. The challenge they faced was that these employ-
ees also had far fewer internal experiences that embodied
the firm’s brand — and thus were less likely to authentically
represent it.
Historically, the public understanding of companies as
‘whole entities’ has been fragmented. There have been ex-
ternal experiences — products, services, marketing and out-
ward-facing staff — and internal experiences by employees,
vendors and contractors working within the organizational
system and culture. Until recently, these have remained
somewhat separate.
Theoretical physicist David Bohm developed the con-
cept of ‘undivided-wholeness’ to describe how humans per-
ceive the same phenomena from different, fragmented, per-
spectives. An example of this is Einstein’s realization that
gravity and acceleration are actually the same force. Simi-
larly, we must move towards an integrated ‘whole-brand’
model, whereby your brand embodies your organization,
which embodies your brand. When this doesn’t happen, you
get brand fragmentation.
Brand fragmentation is extremely dangerous in an age
when the internal experience of an employee and the exter-
nal experience of a customer are inextricably linked. As the
ability for people to know and understand the various expe-
riences of a company increases, the intentionality of the way
each of those experiences is designed and integrated must
increase, too. Bohm explains that undivided wholeness is
“in a constant state of progress or becoming”; and the same
is true for an organization and its brand. In the context of a
whole-brand model, every brand has three key characteris-
tics:
1. It is becoming. A brand is constantly evolving with each
new experience that someone has.
2. It is permeating. A brand is not containable or control-
lable. The organization is porous.
3. It is revealing. A brand acts as a conduit or channel for a
greater understanding of the whole.
So, if modern brands behave in these ways and our ability to
understand their authenticity is increasing, the implication
is that an organization and its brand are always either inte-
grating or disintegrating. In this model:
112 / Rotman Management Fall 2016
Brand Integration = Whole-Brand Authenticity
Brand Disintegration = Whole-brand Inauthenticity
Exhibit A: Brand Integration at Badger Balm
When I pick up a tin of Badger Balm, the first thing I notice
is the illustration of the friendly-looking badger on the lid.
Their range of products feature a whole family of badgers in
various tableaus. For me, the image is strongly nostalgic and
brings back fond memories of reading illustrated storybooks
with my grandmother. The branding implies whimsy and
warmth, with a strong family focus.
I recently had the opportunity to visit Badger Balm at
their facility in New Hampshire, where this sense of family
and warmth — my initial gut reaction — was strongly rein-
forced. Throughout our tour, the founder of the company,
Bill Whyte, also referred to as Badger Bill, pointed to exam-
ple after example of organizational artifacts that reinforced
the brand to me. From its Babies at Work program to its clear
depiction of its social initiatives and B-Corporation ‘Best
for the Environment’ status, to the daily family-style lunch
that we were welcomed to, the Badger brand’s internal ex-
perience was meaningful and authentic. Indeed, the more
I experienced Badger as a whole entity, the more my various
fragmented experiences became integrated.
Exhibit B: Brand Disintegration at Mast Brothers
A fascinating example of brand disintegration is that of the
Brooklyn-based chocolate company, Mast Brothers. In late
2015, a story broke that questioned the brand’s authenticity
and its claims of being ‘bean-to-bar chocolate, handcrafted
in Brooklyn’. Even the authenticity of the founders’ beards
was called into question, and used as an example of mislead-
ing customers. I admit, this flurry of news actually changed
my own perception of this company’s ultra-hip, aloof brand,
and made me question my experience of the product. It had
previously seemed fine to spend $10 for a gorgeously pack-
aged bar of ‘premium’ chocolate; but now it was seemingly
revealed to be mediocre chocolate enfolded in a heavily-de-
signed ruse. No customer likes to be made the fool.
As various fragmented experiences were revealed, the
public story changed. In this case, it was a Dallas-based blog-
ger who exposed ‘secrets of the chocolate industry’. Because
of the age we live in, this post was shared — quickly and
widely. The true Mast Brothers brand will continue to be re-
vealed both externally and internally, over time.
Creating the Conditions for Whole-Brand Authenticity
Take a moment to consider every single person who will ex-
perience any aspect of your company: each of them will have
their own gut reaction to your brand, based on their personal
experience, and — whether you like it or not — each will con-
tribute to your whole-brand narrative. That is why, to ensure
whole-brand authenticity, it’s so important to focus on all of
the conditions in which your brand is experienced.
The whole-brand model can be defined as follows: de-
signing an organization and all of its elements so that the
intended brand is integrated into every experience of it.
Because we cannot control another person’s experience, we
must focus on creating the conditions for them to experience
something meaningful and authentic.
In order to move towards whole-brand authenticity, we
must design the organization to reveal its underlying truth
over time. Marty Neumeier elaborates on his definition of
brand to say that, “It’s not what you say it is, it’s what they
say it is. The best you can do is influence that.” In order to
move towards a whole-brand model, it’s important to let go
of any perceived control that you have over your brand and
instead define what you intend the brand to be, and integrate
that notion into stakeholder experiences through the design
of your organizational systems.
The best place to start is at the confluence of the in-
tended brand, the stakeholder experience, and your orga-
nizational systems. It is at this nexus where the conditions
for authenticity are created. I suggest treating the following
three steps as a cycle, and repeating them over time. Your
first cycle should focus on understanding ‘what currently ex-
ists’, and your second cycle on design. Repeating the process
will allow for continuous development.
1. Define the Intended Brand
When someone interacts with any element of your orga-
nization — human, physical or digital — what do you want
her to feel? What do you want her to do? What do you want
her to think? What exactly would you like to linger in her
consciousness? Utilize any external branding materials
or guiding principles that your organization already has
and try to understand what is at the core of the intended
brand and your business model. You may be able to iden-
tify a single word, like ‘trust’ or ‘wellness’. KEY QUES-
TION: What exactly do you intend for your stakeholder
to experience?
2. Map the Stakeholder Experience
Start with the two most important stakeholder groups: your
employees and your customers. Create a map of the employ-
ee experience and the customer experience, identifying key
points of influence and interaction for each. Keep in mind
that points of influence are the points along a stakeholder’s
journey in which they are most influenced; while points of
interaction are points at which multiple stakeholders inter-
act. Once you have addressed employees and customers,
you can then expand to other stakeholders who are criti-
cally important to your business model. KEY QUESTION:
At what points are your stakeholders experiencing your in-
tended brand?
3. Integrate the Brand into Organizational Systems
Once your points of influence and interaction have been
identified, develop organizational systems that integrate the
intended brand and support those experiences. KEY QUES-
TION: What organizational systems will reinforce stake-
holders’ experience of your intended brand?
While working with a manufacturing and retail business that
was growing rapidly — and wanted to ensure that its unique
vendors could grow alongside it — I developed a Systems
Builder Tool that covers four critical aspects of whole-brand
integration:
THE OPPORTUNITY. Defining what exactly you intend to in-
crease will allow for a shared understanding of the oppor-
tunity that the system is designed to provide. What do you
want to increase?
ACCOUNTABILITY. Determining the specific roles and teams
that are responsible for the system will allow for ongoing
accountability. Who is responsible for implementing and main-
taining the system and ensuring that the opportunity is met?
DURABILITY. The creation of artifacts and rituals that support
the system allow for durability over time and through transi-
tion of employees. What artifacts and rituals will you create
to support the system?
ADAPTABILITY. Specific metrics that track and make progress
visible allow for adaptability over time. What metrics will
make the impact of this system visible?
rotmanmagazine.ca / 113
 The Whole-Brand System Builder Tool

STRATEGY Shared Deep Contextual Consistent Brand- Effective

OPPORTUNITY

What is the Organizational Understanding Aligned Communication

opportunity Vision Among Across Teams Onboarding For Across Functions
for improvement? all Employees All New Hires
What do you want
to increase?
ACCOUNTABILITY

LEADS
Who is responsible
for implementation
and adaptation?

RITUALS +
ARTIFACTS
DURABILITY

What tangible
things will you make
and do to support
the strategy

RESULTS
ADAPTABILITY

In what ways will

you measure
the impact of
the strategy?

FIGURE ONE

In closing
In order to create meaningful and authentic connections
with stakeholders, leaders must focus equally on internal
and external stakeholders and create ongoing opportunities
for the brand to be experienced and revealed over time.
A whole-brand model of organization design will not
only increase external growth opportunities, but also, the
realization of internal opportunities. For instance, with
greater internal brand integration, the likelihood for em- Caleb Dean is Founder and Managing Director of Owl, Fox & Dean,
an organizational design firm based in Boston. He is also Chief of
ployees to innovate and create new value for customers will
Staff at his wife’s family’s 42 year-old natural products business,
continue to increase. What organization doesn’t want more Cambridge Naturals, and is the Advisory Council Co-Chair of the
of that? Design Museum Boston.

114 / Rotman Management Fall 2016

POINT OF VIEW Jim Dewald, Dean, Haskayne School of Business, Author
Strategic
Entrepreneurship 101
FORMER INTEL CEO ANDY GROVE famously
said, “only the paranoid survive.” Clearly,
in a disruptive environment, being para-
noid isn’t enough. How can a business
prepare itself for the possible threat of new
incumbents? To address this question, I
studied some prominent long-surviving firms and found a
consistent theme: over time, they all proactively changed
their strategy to respond to the changing environment.
Traditional strategic planning seeks to pre-plan how the
world will be in years to come — at a time when the reality is
more akin to the Red Queen effect from Alice in Wonderland:
running as fast as you can, just to stay in the same place.
Faced with dynamic environments, firms need to be nimble,
innovative and entrepreneurial — just to survive.
Nevertheless, most firms continue to undertake an an-
nual strategic review and proceed to adopt rigid planning.
Within this paradigm, entrepreneurial ideas and innova-
tions are typically scrutinized through traditional problem-
solving lenses, which rely on prioritizing solutions that are
familiar to management and result in known or highly-
predictable outcomes. Generally, the process is reductive
in nature, beginning with an inventory of alternatives, fol-
lowed by competitive pruning aimed at eliminating risk
and increasing predictability.
This process relies on identifying resources, capabilities
and skills that can be leveraged to take advantage of known
opportunities and to compensate for known threats. Leaders
focus on questions such as, What are our competitors doing?
What do similar firms in different markets do? What have we
done in the past?
In the short term, if environmental conditions such
as market need, technology, economic conditions and
demographics are stable, this approach is completely ra-
tional and can still be helpful in finding the best solution.
But if the intention is to benefit a firm over the long term,
rational decision-making tied to rigid plans will no longer
drive success. A new approach is required: entrepreneurial
thinking.
I define entrepreneurial thinking as a process whereby
entrepreneurial teams — whether conceiving a start-up or
a corporate venture, or just searching for non-standard ap-
proaches to creating value under conditions of uncertainty
— think through opportunity discovery and opportunity cre-
ation in pursuit of creating value.
There is a rising debate in academic circles regarding
whether business opportunities are discovered or created. If
opportunities are primarily discovered, then a firm seeking
to succeed at corporate entrepreneurship should focus its
training, resources, and energy on scanning the market-
place for unexploited or under-exploited opportunities. On
the other hand, if opportunities are primarily created, firms
should focus more on research and development, generat-
ing products or services that can create demand.
Let’s explore this by considering a modern exemplar of stra-
tegic entrepreneurship: Apple. Were the key opportunities
it embraced there for the taking, or did Apple create them
from thin air?
1. THE PERSONAL DESKTOP COMPUTER (APPLE I): Arguably,
Apple created the personal computer market at a time
when people could not really get their heads around the
idea of combining an electronic typewriter with a game
console and a calculator.
2. THE MACINTOSH: This largely entailed discovery of the gap
between what the personal desktop computers of the
day were offering and what the customer was starting
rotmanmagazine.ca / 115
 Firms need to be nimble, innovative and
entrepreneurial, just to survive.
PHOTO: GETTY IMAGES
Gore-Tex creator W.L. Gore personifies the practice
of strategic entrepreneurship.
to see as their potential.
3. THE IMAC: This computer with an integrated monitor and
keyboard (but without a floppy disk slot) was a step for-
ward in convenience and style that was again a discovery
of a missing link for existing customers.
4. ITUNES: This was clearly a discovery in that it served to
replace the illegal pirating of music.
5. IPOD: While there was an element of discovery in this, I
weigh in on the creation side, for the iPod was a unique
device that celebrated a new age in music listening —
1,000 songs in a small box, white earphones, a one-disc
tool for accessing content, and so on. A truly amazing
advance in industrial design.
6. IPHONE: This was a discovery of the somewhat predict-
able merging of smartphones, the iPod, the camera,
and so on.
7. IPAD: We’re back to creation, in that there was clearly no
market for tablets (or at least only a struggling market
for earlier attempts). Indeed, the iPad is interesting
because of the many predictions of failure for what
seemed to be an inferior computer that would not sup-
port plug-ins, printers, common software such as word
processing, and the like.
The evidence from Apple demonstrates the need to develop
both capabilities: opportunity discovery and opportunity
creation. Let’s take a closer look at each.
116 / Rotman Management Fall 2016
OPPORTUNITY DISCOVERY. Market intelligence is king in the
world of opportunity discovery. But when I say market, I
mean much more than the customer market. I mean mar-
kets in an all-encompassing sense that includes supply mar-
kets, sales markets, complementary markets, and even un-
related markets.
In 2005, W. Chan Kim and Renée Mauborgne of IN-
SEAD authored a groundbreaking book titled Blue Ocean
Strategy: How to Create Uncontested Market Space and Make
the Competition Irrelevant. A key component of the Blue
Ocean thesis is opportunity discovery. The authors provide
a framework, referred to as ‘the six paths to find new market
space’. Those paths entail exploration across:
(1) alternative industries,
(2) strategic groups,
(3) customers,
(4) complementary offerings,
(5) functional or emotional appeal, and
(6) timelines.
For example, by exploring and adopting practices from al-
ternative industries, firms can discover new ways to approach
customer needs. Southwest Airlines examined bus and pri-
vate car transportation alternatives to identify key elements
of the Southwest discount point-to-point model. This led to
it becoming the largest airline in the world, as determined by
market capitalization.
Strategic grouping distinguishes product or service of-
ferings within a specific industry. For instance, manage-
ment consulting can come in the form of a single proprietor
(as a member of a single proprietor strategic group) or a
multinational such as McKinsey or BCG. In both cases, the
firm receives management consulting, and without distin-
guishing the quality of each, there are significant differenc-
es in resource capabilities, scope of services, multi-location
offerings, and so on. Consider the beer industry, which has
strategic groups ranging from micro-breweries to global
giants Anheuser-Busch InBev and SABMiller. Consum-
ers buy beer from each, but in terms of brewing, bottling,
distribution, sales, advertising, and so on, they are radically
different businesses.
 Critical Thinking vs. Entrepreneurial Thinking

Rational reduction Entrepreneurial expansion

(Critical thinking) (Entrepreneurial thinking)

Pursuit Problem solving Opportunity seeking

Dominant focus Exploitation Exploration

Criterion One optimal solution Portfolio of options

Approach Optimizing (staying within constraints) Innovating (challenging constraints)

Mindset Fixed Growth

Trajectory of ideas Linear Iterative

Search Local Local and distant

Assumptions about the future Known probability and Knightian uncertainty,

distribution of events with Predictive outlook

Nature of innovations Incremental, competence-enhancing Disruptive, competence-

enhancing and destroying

Business planning Deliberate and proactive Belief foundation – Trial and error

Source of advantage Market power or unique resources Schumpeterian innovator’s advantage

New venture development Comprehensive business plan Lean start-up

FIGURE ONE

Without walking through each of the six categories, it
is important to note that Kim and Mauborgne’s framework
provides a great starting point for firms that are looking out-
side the box for a breakthrough opportunity. This systematic
approach to discovering opportunities can be adopted by
any firm in any industry.
OPPORTUNITY CREATION. Creating opportunities from scratch
is often tied to the firm’s resource base — more specifically,
to R&D, new product or service development and engineer-
ing. Opportunities are created by developing new products
or services that reflect what customers will want — not what
they are seeking today. In support of this approach, Robots
& Pencils CEO Michael Sikorsky argues that planning is
an important component of opportunity creation that must
be taken seriously and be pursued with diligence. It is in-
structive here to quote Sir Winston Churchill: “Plans are
of little importance, but planning is essential.”
When creating opportunities, it is essential to make
plans and look toward the future. Of course, the risk quotient
will be much higher for opportunity creation because the en-
trepreneur is presenting something completely new to what
is often not an existing customer, but a forecasted one. But if
the effort succeeds, the reward can be much greater.
Opportunity creation connects more directly with
conventional theories of invention leading to innovation.
Invention is the creation of something new; innovation is
the commercialization of that invention. Invention was cre-
ating the stickiness that led to the innovation of 3M Post-its;
invention is the internal combustion engine, which led
to the innovation of cars, motorcycles, lawn mowers, air-
planes, and so on. This is the traditional world of patents

rotmanmagazine.ca / 117
 Successful Companies That Evolved Their Business Model

Name Est. Original Evolving Commentary

business business(es)

Honda 1946 Motorcycles Anything Honda views its source of competitive advantage as emanating
self-propelled from engineering prowess regarding mechanical motion.

Hasbro 1923 Textile Toy company The textile company started making pencil cases, which
remnants introduced them to children, and eventually Mr. Potato Head.

IBM 1911 Tabulating Technology IBM has faced multiple changes in its core business
& recording consulting with tremendous ability to adapt.

Xerox 1906 Photographic Digital imaging, A family business where the son purchased
paper IT consulting the invention that led to photocopying.

Nucor 1905 Automobile Steel production Nucor was highly diverse conglomerate
Steel manufacturing that twice filed for bankruptcy.

3M 1902 Mining Scotch tape, duct The company started mining mineral deposits for grinding-wheel
company tape, Post-it notes, abrasive, shifted to sandpaper, and then adhesive.
cleaning products

General 1892 Lightbulbs Diverse – turbines, Thomas Edison started the company as a means to bring
Electric locomotives, CT together all of his electrical inventions, most importantly,
scanners, chemical the lightbulb.
sensors, finance

Avon 1886 Book sales Perfume A door-to-door salesman whose free perfume samples drew
more attention than book sales.

Levi 1873 Dry goods Jeans Levi Srauss moved to California to expand his family’s dry
Strauss goods business, and tried selling canvas tents to gold-seekers.
A prospector asked him to make pants.

Nokia 1865 Pulp mill, Mobile phones Microsoft purchased Nokia in 2013, but before that, the company
rubber, cable was a model of corporate entrepreneurship.

Tiffany 1865 Stationery Jewelry Unique designs made Tiffany’s the first American company
& Co fancy goods to gain international acclaim for jewelry.

Dupont 1802 Gun powder Polymer adhesives, A legacy of innovation and entrepreneurial thinking that serves
manufacturing insecticides, fire as a model for all.
extinguishers, etc.

FIGURE TWO

and systematic invention leading to innovation paths.
Some refer to it as the ‘push’ approach to innovation, in the
sense that the invention pushes the idea into a marketable
innovation.
W.L. Gore, makers of Gore-Tex fabric and various
products based on polytetrafluoroethylene, is another
company that personifies the practice of strategic entrepre-
neurship. After 16 years in technical positions at DuPont,
Bill Gore founded the company with his wife Genevieve
Gore. Their dream was to found an organization that ran
democratically, without bosses telling people what to do,
but with people self-selecting which projects they wanted
to work on, who would be on their team, and so on.
At W. L. Gore, there are no traditional organizational
charts, chains of command, or predetermined channels
of communication. Instead, people communicate directly

118 / Rotman Management Fall 2016

with each other and are accountable to fellow members of
multi-disciplinary teams. Hands-on innovation is encour-
aged, involving those closest to a project in decision mak-
ing. Teams organize around opportunities, and leaders
naturally emerge.
Anchored by entrepreneurial thinking, this organiza-
tional culture and system has driven W.L. Gore and Asso-
ciates to be a highly prolific innovator of myriad products,
including Gore-Tex, medical devices such as synthetic blood
vessels, guitar strings, and diverse industrial products—in-
cluding the structural materials that were used in the retract-
able roof at Wimbledon. Clearly they are doing something
right: W.L. Gore has been named to Fortune Magazine’s list
of 100 Best Companies to Work For every year since 1984.
In closing
Regardless of industry, following the herd has become
highly risky behaviour. Today’s most successful companies
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thrive by establishing decision-making processes that con-
stantly engage new opportunities and allow them to adapt
quickly to disruptive technologies and business models.
To avoid extinction, leaders must embrace the ben-
efits of reinvention. Longevity can still be achieved — not
by tossing strategic management aside, but by concurrently
adopting a strategic entrepreneurship approach that enlists
entrepreneurial thinking to hedge changing environmental
conditions.
Jim Dewald is the Dean and Associate Professor of Strategy and
Entrepreneurship at the Haskayne School of Business, University
of Calgary. He is the author of Achieving Longevity: How Great Firms
Prosper Through Entrepreneurial Thinking (Rotman-UTP Publishing,
2016), from which this article was adapted.
Visit us at www.impactconsultinggroup.ca
t: 416 978 4343 e: info@impactconsultinggroup.ca
rotmanmagazine.ca / 119
 POINT OF VIEW Marco Annunziata, Chief Economist, General Electric
Disruptive Innovation:
The Challenge
and the Solution
THE RELATIONSHIP BETWEEN MINDS and ma-
chines lies at the very heart of innovation,
and its history has brought fundamental
disruptions to the global economy. To date,
this relationship has had three key stages
— the third of which is unfolding today.
The first stage came when we introduced powerful
tools to help with agricultural work. Until then, agriculture
had been the pillar of economic growth; suddenly, ma-
chines could be used to reduce workload. The second stage
was the Industrial Revolution, which saw the introduction
of even more powerful machines and the expansion of in-
dustry, with successive waves of automation. That phase
was similar to the first, in that we were again using ma-
chines to unburden us from some of the hardest and most
tedious tasks that humans were performing. While the in-
troduction of machines to agriculture was important, it was
the Industrial Revolution that really kicked off the process
120 / Rotman Management Fall 2016
of productivity growth, and with it, exponential improve-
ments in standards of living.
We have now evolved to a third stage, in which we are
learning to use machines to help us perform better in the
areas of intelligence and information. It is no longer just
about using machines to unburden ourselves from physical
tasks: it is about taking advantage of the fact that they can
perform a larger number of tasks with greater precision and
speed than humans.
The relationship between minds and machines has
always been fraught with contradictions — featuring ele-
ments of hope mixed with fear. We love to use machines to
do things that we don’t like to do, but at the same time, we
have an instinctive fear that they might somehow replace
us, or not work in our interest. These concerns were prob-
ably less important during the first wave of mind-machine
interaction — but we saw them very clearly in the Industrial
Revolution. In both cases, however, no one was yet making
 The economic potential of this new phase of mind-machine
interaction has been under-estimated.
comparisons between the mind and the machine. The de-
marcation line between the two was very clear.
With the current wave of mind-machine interaction,
this line is becoming, to some extent, blurred. With the de-
velopment of Big Data mining, robotics and artificial intel-
ligence, we are looking at the possibility of machines taking
over a number of intellectual tasks, which is leading people
to ask complicated questions such as, ‘What exactly makes
humans special?’ This is not just a philosophical question, it
is an economic one, because it amounts to asking, ‘What is
the best division of labour between minds and machines?’
In my view, the economic potential of this new phase
has been under-estimated, in part because we are just at the
beginning of it, and in part because we are coming out of the
healing process after a long global financial crisis and reces-
sion. There is still a sense of pessimism in the market, with
most people believing that growth is still weak and that there
isn’t much industrial economic opportunity coming from
the emerging relationship between minds and machines.
I view things quite differently: once you start mak-
ing industrial machines and supply chains more intelligent
through data and sensors, what you get is a more produc-
tive economy, leading to more jobs and economic growth.
These productivity gains, in a sense, are not dissimilar to
the second evolutionary wave. The difference is, we will
soon have software that helps us predict when and what will
go wrong with any piece of equipment, when and where to
intervene before an outage occurs, how to plan around it,
and eventually, how to eliminate outages or stoppages in
production altogether.
On top of having humans learning to leverage the com-
puting power of machines, we are also now leveraging the
ability that arises when machines put humans into contact
with each other. In terms of software development, this has
been going on for a while, but when you look at industry, we
have only been dipping our toes in the water so far. I believe
this will accelerate over the next 20 to 30 years, with busi-
ness and governments exploring strategies and incentive
structures for people to cooperate in ways that reward open
innovation while safeguarding intellectual property.
Yet another aspect of enhanced mind-machine inter-
action is progress in advanced manufacturing techniques.
These techniques allow you — and by you I mean the engi-
neer, the innovator, the thinking brain — to start figuring out
completely new products that are ‘smart by design’ — rather
than being smartened by having sensors added on top of
them. This is another area where we will see enormous prog-
ress over the next 20 years, and the most promising area of
impact will likely be healthcare.
One tipping point here is whether or not we will reach
a stage where concerns over artificially-engineering human
capacities become so strong that they force policymakers
and businesses to turn research the other way. This will be a
critical moment because, in a sense, it represents the other
side of the blurry line — where our minds become more like
machines.
Against this backdrop, in January, GE released its bi-
annual Global Innovation Barometer (GIB), which explores
how business leaders around the world see innovation,
and how their views are shaping their strategies. The GIB
is now in its fifth edition, spanning 23 countries. This year,
we spoke to 2,748 business executives, of which 1,915 were
from the C-suite. All were responsible for making decisions
related to innovation, product development or research
and development activities. We also spoke to 1,346 ‘in-
formed citizens’ with university education or above, who
regularly consume top-tier business-news publications and
follow public policy matters.
rotmanmagazine.ca / 121
 Innovation Champions: Japan is Back, Germany Down

Survey question: What is the country that you consider to be the leading innovation champion?

33%

17%

10% 9%
3% 3% 3% 3% 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%
E

en
A

ea

el

UK

lia

da

ia

nd

sia

co

d
UA

ke
an

or
pa

in

di

nc

ric

an
US

KS

ss
ra

ed

ra
r

i
na

la

ay
Ch

ex
In
Ko

ap

r
m

Is

Af
Ja

nl
Ru
Sw

st

er

Tu
Fr

Ca

al

Fi
er

ng

Au

itz

h
h

M
G

ut
ut

Si

Sw

So
So

-3 +5 -6 -1 -1 +1 +2 = = +1 +1 +1 New Entrants = New Entrants

FIGURE ONE

Overall, the latest GIB indicates much greater optimism
regarding innovation than we have seen in the past: some
two-thirds of both business executives and the informed
public believe that the digital-industrial revolution will have
a positive impact on the economy and on society. Optimism
is particularly strong in countries where economic growth
already benefits from technology — especially those in Asia.
On balance, emerging markets are much more posi-
tive and enthusiastic than advanced economies. To me, this
makes sense , because digital innovations can help these
markets bypass weaknesses in their infrastructure and insti-
tutions, enabling them to leapfrog quickly to new technolo-
gies. Interestingly, this optimism is starkly at odds with the
negative tone of most headlines in the global financial press.
What has made people so optimistic? Here is my theory:
first, the economy is actually doing much better than head-
lines suggest. Global growth is proceeding at a healthy pace,
and the U.S. is back to full employment. Second, digital-in-
dustrial innovation is already taking place, and it is not de-
stroying jobs; people see that, and as a result, many of them
no longer buy into the techno-phobic narrative.
So, which country is the best at innovation right now?
This year, the U.S. still led the league tables; Japan was sec-
ond — and faced with slow growth and adverse demograph-
ics, it is redoubling its digital innovation efforts. Germany
and China were very close behind, with business leaders
ranking Germany number three, while the public gave
China the edge. Having China in the top four does not jive
with the stories we read in the newspapers — about how
China’s economy is grinding to a halt because they have ex-
hausted their model of low-cost manufacturing. But what I
see on the ground tells me the GIB has it right: China is al-
ready an innovation power to be reckoned with.
Make no mistake: jobs will change, and new skills will be
required. Following are the top five key takeaways from this
year’s Global Innovation Barometer.
1. Minds and machines will increasingly work together;
2. Creativity and problem-solving are the top two skills for
the workforce of the future;
3. The ROI on collaborative initiatives between organiza-
tions will continue to increase;
4. Emerging markets are significantly more fearless than
others in embracing innovation; and
5. There is a call for greater government support to break
down barriers to innovation.
Let’s take a closer look at each.
MINDS AND MACHINES WORKING TOGETHER. Perhaps surprisingly,
few respondents feared any negative impact on employment
as a result of the digital revolution: only 17 per cent of execu-
tives and 15 per cent of citizens foresaw negative impact. In-
deed, executives expect that the digital revolution will make
the workplace safer (43 per cent) and create higher-value

122 / Rotman Management Fall 2016

 Positivity Prevails Across a Majority of Surveyed Countries

Optimism

Over index Under index

Global average
88%

88%

86%

84%

84%

68%
81%
81%

81%

79%
77%

77%

76%

76%
75%

75%
74%

72%

69%
70%

66%
65%

63%

63%

63%
63%

61%
60%

60%

59%

53%

50%
41%

39%
37%

36%

33%
sia

el

ria

ey

ria

a
nd

sia

il

ia

lia

da

en

ce

ea

n
az

an
in

di

pa
ric
ic

KA

UA
US
ss
ra

ra
rk

r
an
ge

ge

ed
na
la

ay
ne

Ch

ex

In

Ko
Br

m
Is

Af

Ja
Ru

st
Po
Tu

Fr
Ca

Sw
Ni

Al

al
do

er
Au
h

h
M

G
ut

ut
In

So

So
FIGURE TWO

roles for workers (48 per cent). Executives in the U.S., India, profit generated by it has grown over the last two years:
China and Germany anticipate a positive outcome for their 77 per cent of executives (up from 64 per cent in the previous
country, while Japanese, French and Swedish executives GIB) said that revenue and profit generated via collabora-
were a bit more skeptical. What if technology evolves faster tive activity has yielded improved financial results for their
than businesses can adapt? The vast majority (81 per cent) organization. Furthermore, 68 per cent of executives de-
of executives are mindful of the risk of ‘digital Darwinism’, clared that their firm is ‘open to the risk-sharing associated
or fear of becoming obsolete (FOBO). Only 24 per cent felt with innovation’, including revenue streams or losses that
their company is ‘performing very well’ at quickly adapting could be generated through collaborative initiatives. So,
and implementing emerging technologies. leaders are more willing to share both the gains and risks of
collaborating, and they are seeing growing results: 77 per
THE IMPORTANCE OF CREATIVITY AND PROBLEM-SOLVING SKILLS. cent have increased revenue and profit through collabora-
In terms of the skills required for the years ahead, the GIB tive innovation in the last two years — up from 64 per cent in
shows that creativity and problem-solving skills were most 2014. Interestingly, the biggest increase in collaboration has
important to executives, followed by interpersonal skills. been amongst smaller businesses.
Workers with these skills will be in very high demand, and
as a result, talent acquisition will remain a key determi- EMERGING MARKETS FEARLESSLY EMBRACE INNOVATION. Execu-
nant of corporate success and the primary success factor in tives from emerging markets appear to be feeling more op-
terms of innovation. The catch is that our education system timistic and empowered by the Fourth Industrial Revolution
is not widely prepared to train for these in-demand skills. than their peers in developing economies. Asian markets are
Barely half of our respondents said that their education sys- amongst the most excited and confident, while informed
tems are up to the task. Asian countries were the most con- citizens in developed markets are feeling the least in control.
fident — and indeed their education systems tend to place
a stronger emphasis on science, technology, mathematics A CALL FOR GREATER GOVERNMENT SUPPORT. While most respon-
and engineering (STEM). dents believed that the private sector is firmly in the driver’s
seat with respect to innovation, executives and citizens alike
THE ROI ON COLLABORATION IS INCREASING. Collaborative in- called for public authorities to play a more supportive role.
novation has increased in most markets, and revenue and Few citizens (12 per cent) believed their government was

rotmanmagazine.ca / 123
 ‘the top driver of innovation’ in their country, but signifi- Why aren’t businesses innovating more effectively? The
cantly more (30 per cent) said that it should be. More than informed public thinks internal inertia and a lack of leader-
half (57 per cent) indicated that their country’s regulations ship are the culprits, while executives blame ineffective
are ‘not supportive of innovative companies’ — although business models. The top three best practices identified by
emerging markets were more positive in their assessment. both groups were:
Most executives agreed that data and privacy regulations • Having a clear process and structure in place to manage
were preventing more radical innovation by businesses, innovation;
while the majority of citizens (64 per cent) indicated they • Encouraging and rewarding innovative people; and
are willing to share access to their data, if it would lead to • Creating a connected culture where idea sharing is fa-
better service. cilitated and contributing parties are recognized.
There was general agreement (90 per cent) among
executives and citizens alike that the most innovative com- In closing
panies are not those who launch new products and services In the midst of this third wave of mind-machine intera-
— but those who create new markets that did not previously tion, GE’s 2016 Global Innovation Barometer confirms two
exist. Being disruptive has become the gold standard for things: that the digital-industrial revolution is very real; and
businesses, and as a result, 81 per cent of executives agreed that it is well underway. My colleagues and I firmly believe
that ‘embracing a start-up ethos’ is becoming the norm. that innovation will create new and better job opportunities,
While they clearly recognize the need to innovate radi- across industries. The workforce, though, will need to go
cally in order to keep up, most business leaders continue to through a significant transformation, because as indicated,
favour a ‘safer’ approach: for most respondents, incremental the jobs of the future will demand well-developed problem-
innovation still drives the bottom line, particularly in devel- solving abilities and creativity. Education and training need
oped markets. When asked, ‘In the past few years, what kind to catch up — and fast.
of innovation has contributed the most to your company’s
performance?’, 58 per cent said they are ‘focused on maxi-
mizing performance of existing revenue streams and busi-
ness models’. Their goal: to protect their core business as
much as possible, so that it continues to generate the prof-
itability needed to support research and innovation efforts.
So, leaders know that disruptive innovation is the winning
card, yet they are struggling with it and reverting to incre-
mental innovation — and this leaves them anxious.
However, emerging markets — particularly in Asia —
are embracing radical innovation and seeking opportuni-
ties to leapfrog. Their goal: to bring innovative products
and/or services to market as quickly as possible, without
worrying about the short-term impact it might have on the
core business. As a result, we can expect to see companies
investing more effort and resources in fostering disruptive
Dr. Marco Annunziata is Chief Economist and Executive Director
innovation, focusing on the elements highlighted above: of Global Market Insight at GE, based in New York City. He is the
a talented and flexible workforce, speed, and more and author of The Economics of the Financial Crisis: Lessons and New Threats
smarter risk-taking. (Palgrave MacMillan, 2011).

124 / Rotman Management Fall 2016

POINT OF VIEW Frank Spencer and Yvette Montero Salvatico, Kedge
Embracing
a Transformational
Mindset
EARLY IN THE 20TH CENTURY, Austrian-born
economist Joseph Schumpeter coined
the phrase ‘creative destruction’ to de-
scribe the disruptive process of ongoing
technological and economic innovation
within capitalism. In his day, theories of
disruption were developed to describe
the cycles of change that were a part of
normal market forces. Little did Schum-
peter know that the landscape of busi-
ness in the early 21st-century would be
dominated by ever-shorter intervals of
volatile disruption that would radically redefine the very
concept of ‘normal’.
Today, we live in a world where creative destruction
is happening faster than we can react. Whether the radical
changes are in products, services, experiences, technology
or organizational models, we seem to have entered an age of
perpetual instability in business and society where the new
mantra is, ‘disrupt or be disrupted’.
Today’s leaders generally espouse one of two views
about disruption. Some see the concept as a glorified buzz-
word that is used mainly by Silicon Valley startups looking
to create unique solutions to non-existent problems. In this
view, disruption is not organic, but manufactured, attack-
ing continuity for the sake of change and the hope of being
the next Unicorn. Others see disruption as a natural conse-
quence to our age of increasing complexity, but view it as a
force that is ‘pushing from the outside’ — effectively bully-
ing organizations into upending their present-day offerings
or approaches. This mindset causes leaders to be reactive in
the face of accelerating changes in business and society.
What if we could create a third view of disruption that
enables us to build proactive organizations that aren’t con-
stantly in the act of chasing or being chased? To build such
a proactive culture, we need to look beyond the present re-
search — which is mostly concerned with recognizing where
disruption is coming from or how to avoid it. Though such
research is important, it leads us to a reactionary response
that is based in risk and fear. Transcending disruption in an
rotmanmagazine.ca / 125
 We are beginning to take our evolution as a species
into our own hands.
age of increasing complexity means that we must change
our organizational focus: instead of fixating on the idea
of disruption ‘pushing from the outside’, we must adopt a
new mindset of ‘pulling’ our organizations towards disrup-
tion. Whereas being pushed by external forces puts leaders
constantly on the defense, the concept of pulling your firm
towards something puts you in the driver’s seat.
In the Schumpeterian language of creative destruc-
tion, a focus on having something pushed upon us is akin
to approaching the process of disruption from the ‘de-
struction’ side: What is being destroyed? Who is causing
the destruction? How can I be the first to deconstruct or
dismantle existing products, services or models?
Conversely, an organization that focuses on pulling
itself towards destruction can harness the creative aspects
of Schumpeter’s theory: What opportunities have we yet
to recognize? How can we move beyond our present capa-
bilities? How can we become more adaptive, resilient and
transformative? This is not to say that both sides of the equa-
tion aren’t important, but focusing only on the destruction
side of disruption leaves organizations weakened and vul-
nerable.
In order to unlearn the reactionary focus created by
pushing and relearn the empowering mindset created by
pulling, it is important to understand the patterns that are
currently shaping our environment. Once we have a grasp
on what is emerging around us, we are in a better position
to pull ourselves toward transformative development — or
even pull new opportunities into our organizations that we
might have otherwise missed.
In our research over the past several years, we have
identified three major patterns that are shaping and shifting
the global landscape.
Creative Complexity. A plethora of colliding trends and is-
sues suggest that complexity is not just accelerating expo-
nentially, but that it is being embraced and harnessed as a
means to create new platforms and models. Rather than de-
fining complexity as an enemy of organizational and social
development that must be eliminated, today’s makers and
entrepreneurs are leveraging our vista of growing conver-
gence in order to give birth to new economic developments,
such as collaborative consumption and blockchain technol-
ogy; unique business models, in the form of decentralized
126 / Rotman Management Fall 2016
autonomous organizations and participatory cooperatives;
and rising technologies like intelligent agents, convergent
cloud networks and IOT (Internet of Things).
In a previous era — when separate silos and disciplines
were created to maximize efficiency — we sought ways to
simplify complexity as a means to increase innovation. To-
day, we are recognizing that complexity is evolutionary and
organic — and that a growing canvas of transdisciplinary
ideas affords us a greater capacity for transformation.
Blurred Reality. Accelerating advancements in technology
and shifts in social values are rapidly expanding our defini-
tion of reality and meaning. So impactful is this change that
many social scientists are saying that a separation between
the physical and digital worlds is just as ludicrous as believ-
ing in the ancient fallacy that our bodies were separate from
our minds. The breakneck growth of virtual and augmented
reality, artificial intelligence, brain-computer interfacing,
digital currencies, wearable technology, near-field commu-
nication and ubiquitous internet connectivity have made
intangible platforms just as real and important as those in
the tangible world. This ‘technological blurring’ is also nor-
malizing our desire to simultaneously express multiple iden-
tities in every aspect of our lives — and even making the idea
of working for only one employer at a time or being focused
on a singular purpose an obsolete way of thinking.
Redefined Humanity. Humans are organic. We don’t
thrive in environments built solely on top-down control or
short-term outcomes. Rather, we thrive in environments
filled with purpose, deep meaning, creativity and connec-
tion. Instead of simply letting our collective path unfold
through accidental or even biological means, we are begin-
ning to take our evolution as a species into our own hands.
This movement is being driven largely through trends
surrounding human and technological integration which
is making networking and collaborative innovation pos-
sible on a global scale; nature-inspired practices such as
‘swarming’ and ‘hiving’ to produce generative city devel-
opment; and creating passion-oriented lifestyles in busi-
ness and society. Crowdsourcing is empowering us to be
adaptive and transformational in ways that were never
possible before, and this new environment is radically alter-
ing our traditional models of business, education, culture
 We must include multiple alternative futures
in every one of our decisions to make our strategy
agile, elastic, adaptive and transformative.
and what it means to be human.
Now that we have a better understanding of the shift-
ing global landscape that is pushing at us from the outside,
we are ready to employ three approaches that will empower
us to transcend disruption and embrace a mindset of pulling
ourselves — and our organizations — to the outside.
1. SPECULATIVE INQUIRY
This is the practice of continually learning, unlearning and
relearning in order to ‘disrupt disruption’. Speculative In-
quiry helps us to unlearn and re-learn by launching us past
public-facing knowledge and ideas, traditional competitive
or business intelligence, present-day issues and pervasive
technologies. Instead, the leaders and organizations that
desire to transcend disruption are looking for provocative
futures and far-reaching breakpoints of change — emerging
possibilities and alternatives that result from the collision of
today’s environmental and horizon scanning efforts. These
possibilities aren’t identified through fanciful brainstorming
exercises, but rather, are the result of pattern recognition
methodologies and tools — the clustering of trends, shift-
ing values, implications and the subsequent new landscape
of change that help us to ‘recolonize’ the future and make
sense of the world of tomorrow. Once identified, it is the ten-
sion between this speculative scanning and the immediate
core competencies of the organization that creates a middle
ground of transcendent ‘futures intelligence’ that can reveal
new strategies, innovations, platforms and models.
2. MULTI-FACETED STRATEGY
It has been noted that whenever we make a decision, we kill
every future except one. Our mechanical view of organiza-
tional development has taught us that we must choose one
‘official future’ from among many possibilities, and tie our
fortunes to that one decision. However, McGill Professor
Henry Mintzberg has said, “Planners should make their
contribution around the strategy-making process rather than
inside it. They should supply the formal analyses or hard
data that strategic thinking requires, as long as they do it to
broaden the consideration of issues rather than to discover
the one right answer.” Multi-Faceted Strategy is a process by
which we include multiple alternative futures in every one of
our decisions, making our strategy and actions agile, elastic,
adaptive and transformative. We have developed a tool that
begins with the long-range aspirations, goals and opportuni-
ties that an organization has identified, and then compresses
and synthesizes these actions and ideas into a robust strat-
egy. In this way, organizations are able to pull to the outside
to design transformational vision and new core capabilities.
3. HIGHER-ORDER PURPOSE
The last approach needed to transcend disruption is the
identification of the higher-order purpose of the organiza-
tion. Each business or social entity contains not only the
seeds of greater potential, but also of greater mission and
aspirational ability. Discovering that purpose and pulling
yourself towards it requires the mapping of transforma-
tional growth curves that begin with your organization’s
nascent competency and ascend through multiple break-
points and breakthroughs. Those breakthroughs and high-
er-order purpose are inherent in the DNA of your products,
services and models, but don’t look like glorified versions
of the original that have simply been teased out through in-
cremental iterations. Each breakthrough leads to new com-
plex manifestations of the original, and opens the organiza-
tion to new ways of seeing itself and unique opportunities to
pull itself to the outside.
In closing
As organizations move past the concepts of top, bottom
and lateral disruption to a more liberating and empowering
mindset of transformation, they will find that the ‘unknowns’
that once pushed them from the outside will instead become
their greatest assets. If we learn to intentionally pull our-
selves to the outside — and pull the outside into our organi-
zations — we can foster a creative force beyond what Schum-
peter could have possibly imagined.
Frank Spencer is a Principal and Creative Director at Kedge, which
develops futures-empowered organizations in a world of volatile
change. His clients have included Lego, Daimler, Hasbro, Procter
and Gamble and The Walt Disney Company. Yvette Montero Salvatico
is a Principal and Managing Director at Kedge. Previously, she led
the effort to establish the Future Workforce Insights division at
The Walt Disney Company.
rotmanmagazine.ca / 127
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