N

MANAGEMENT
WINTER 2018: CREATIVE DESTRUCTION

Google’s Project Loon balloons have

flown millions of test kilometers around the
world, in an effort to learn what it will take to
provide internet connectivity to everyone—
everywhere. In partnership with telecom
companies, Google is enabling people to
connect to the balloon network directly from
their phones. This is just one of the projects
underway at the company’s ‘moonshot
factory’, whose mission is to invent and
launch technologies that will make the
world a radically better place.

Features

6 20 28
Moonshots: Achieving The Future of Growth: How AI Will Transform Business
Breakthrough Innovation in AI Comes of Age by Tiff Macklem and Michael Zerbs
Established Organizations by Jodie Wallis and Deborah Santiago (MBA ’89)
by Anita M. McGahan A new factor of production is on the What does AI mean for businesses
Embracing a transformative goal is horizon, and it promises to transform big and small? What key opportunities
one way to move a legacy business the basis of economic growth and challenges does it present?
from the brink of disruption to for countries around the world. Two experts on the topic weigh in.
a new business model.
 34
A Winning Formula: Disruptive
Innovation + Jobs to be Done
by Stephen Wunker and David Farber
The theories of disruptive
innovation and Jobs to be Done
are natural complements.
52
Leadership Forum: Digital
Transformation is Underway
by Glenda Crisp, Connie Bonello,
Jon Zimmerman and Thayde Olarte
Senior leaders from TD Bank Group,
IBM, GE Healthcare and Scotiabank
describe how they are embracing — and
enabling — digital transformation.
Sense
Seize
68
How to Sense and Seize
Opportunities—and Transform
Your Organization
by George Day and Paul Schoemaker
Three dynamic capabilities — sensing,
seizing and transforming — can help
an organization extend or modify
its resource base.
40
Creating Great Choices: A Leader’s
Guide to Integrative Thinking
by Jennifer Riel and Roger Martin
There are consistent patterns to
the ways that integrative thinkers go
about generating creative solutions.
56
CEO Spotlight: Staying Relevant
in a Disruptive Age
by Karen Christensen
Large, established corporations
often have trouble staying relevant
over time. Not so for Estée Lauder.
CEO Fabrizio Freda explains.
Great service... highly
recommend. ;)
76
Reputation Management
Goes Digital
by Anne Bowers and
A. Rebecca Reuber
Organizations need to proactively
manage their digital reputation.
The good news is, online ratings can
be used as a learning tool.
46
The New Leadership Imperative:
Embracing Digital Transformation
by Maxwell Wessel
Digital transformation is possible for
any organization. And it is becoming
more necessary by the day.
62
A Start-Up is Born:
The Story of Helpful
by Karen Christensen and Sharon Aschaiek
A start-up isn’t a ‘company’ in
the traditional sense; it’s a learning
machine, says serial entrepreneur
Daniel Debow (JD/MBA ‘00).
82
The Democratization
of Judgment
by Alessandro Di Fiore
In an age of Big Data and Artificial
Intelligence, the exercise of
judgment by employees throughout
an organization has never been
more important.
 Rotman Management
Winter 2018
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5 Contributors
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FROM THE EDITOR Karen Christensen
Creative
Destruction
WHETHER YOU WORK IN FINANCE, healthcare, consumer products or
high tech, you share a common challenge with your fellow lead-
ers: No one has the luxury of basking in yesterday’s — or even
today’s — success. The humbling fact of life is that virtually ev-
erything you thought you understood about running your busi-
ness successfully is open to better ways of doing things.
The term creative destruction was coined by Economist Jo-
seph Schumpeter to describe the process of ‘industrial muta-
tion’, whereby a radical new innovation leads to the demise of
what existed before it. Schumpeter was clear that whenever cre-
ative destruction occurs, there are winners and losers. Think of
the smartphone, which all but killed the market for not only regu-
lar cell phones, but also point-and-shoot cameras, wrist watches,
calculators and voice recorders — amongst other things. Despite
this destruction, in Schumpeter’s mind, the net economic benefit
of radical innovation is always greater than if that innovation had
not been introduced.
In this issue of Rotman Management, we will look at how cre-
ative destruction is unfolding, and the thinking and leadership
required to fuel and navigate it. We kick the issue off on page 6
with Moonshots: Achieving Breakthrough Innovation in Es-
tablished Organizations, in which Rotman Chair in Manage-
ment Anita McGahan describes how the most innovative com-
panies embrace difficult-to-achieve goals that change the playing
field in their industry.
The gap between understanding and adopting artificial in-
telligence (AI) remains large at most companies, according to a
global study by MIT and the Boston Consulting Group: Almost
85 per cent of executives believe that AI will allow their compa-
nies to obtain or sustain a competitive advantage; yet only one
in five has incorporated AI in their offerings or processes. On
page 20, Accenture’s Jodie Wallis and Deborah Santiago look
at how to close this gap in The Future of Growth: AI Comes
of Age.
Digital disruption is a key aspect of the current landscape,
with widespread implications. On page 46, SAP’s Maxwell
Wessel describes The New Leadership Imperative: Embrac-
ing Digital Transformation.
Elsewhere in this issue, we feature Creative Destruction
Lab founder Ajay Agrawal in our Thought Leader Interview
on page 14; Rotman School Dean Tiff Macklem and alumnus
Michael Zerbs (MBA ’89) discuss How AI Will Transform
Business on page 28; and Estée Lauder CEO Fabrizio Freda
shows how a large corporation can remain relevant in an age of
disruption, on page 56.
In our Idea Exchange section, IDEO CEO Tim Brown
describes the challenges for innovators on page 90; Wharton’s
David Robertson discusses a ‘third way’ to innovation on page
94; NYU’s Scott Galloway describes Facebook, Amazon,
Apple and Google’s race to be the first trillion-dollar com-
pany on page 108; Cambridge School of Business Fellow Navi
Radjou describes ‘frugal innovation’ on page 120; and Rotman
professors Anne Bowers, Rebecca Reuber, Sarah Kaplan,
Joshua Gans, Spike Lee, Chen-Bo Zhong, Heather Fraser
and Mihnea Moldoveanu discuss findings from their research.
The key to competitive advantage right now sounds de-
ceptively simple: Ensuring that innovation is an integral part
of your core strategy. The fact is, we can’t take for granted that
the future will be better — and that means we need to work to
create it, today.
Karen Christensen, Editor-in-Chief
editor@rotman.utoronto.ca
Twitter: @RotmanMgmtMag
rotmanmagazine.ca / 5
 MOONSHOTS:
Achieving Breakthrough Innovation
in Established Organizations
Embracing a transformative goal is one way to move a legacy
business from the brink of disruption to a new business model.
by Anita M. McGahan
IN THE FIELD OF MANAGEMENT, the term ‘moonshot’ has emerged
to describe a breakthrough goal on a five-to ten-year horizon
into the future. The idea is that a moonshot represents a goal
so compelling that it motivates virtually all stakeholders to strive
toward its achievement — despite the difficulty and complexity
of the path to success.
In Silicon Valley, the term is reserved for only the most im-
portant innovations: The microprocessor was a moonshot, as
was the first personal computer (the Apple II), the World Wide
Web and Apple’s iPhone. Google has famously invested more
than $800 million in moonshots like autonomous vehicles, cre-
ating tens of billions of dollars of market value for the company.
The question is: Can an established organization that has
been successful in a legacy business adopt this approach? Despite
many studies showing the value of setting long-term goals on the
model of a moonshot — including fascinating books by former
Pepsi and Apple CEO John Sculley, and Lisa Goldman and co-
authors — relatively little has been written about a process for
developing a breakthrough goal at this level.
In this article, I will offer some insights on a process for de-
veloping a moonshot for an organization that seeks to address
industry disruption by developing a fundamentally new busi-
ness model.
A Historical Concept
Moonshots get their name from U.S. President John F. Kenne-
dy’s 1962 speech announcing that his country would seek to put
a man on the moon and return him safely to the earth — and that
this goal would be accomplished by the end of the decade.
A number of management strategists have analyzed this
speech, which is widely heralded as among the most compel-
ling in history, to identify what made it so memorable, important
and unifying. Their conclusion: What made the Moonshot
ambition stand out was its simplicity, clarity, significance and
technical feasibility.
Speaking at Rice University in Houston in September 1962,
President Kennedy sold the moonshot idea on arguments that
harkened back to the very foundations of the U.S. as a ‘frontier
rotmanmagazine.ca / 7
 A moonshot is a route to renewed leadership under radically
new technological and cultural conditions.
state.’ The stakes, he argued, reflected the most essential and
important purpose of government, which he framed as ‘assuring
peace in space.’ Kennedy aligned the aspiration to put a man on
the moon with a principle espoused by the pioneers that gave life
to the U.S. centuries earlier: Harnessing technology in the inter-
ests of freedom.
The Moonshot speech was also backed by a detailed evalu-
ation of the chances of success. The President’s advisors had
determined that, while the precise route to putting a man on the
moon within a few years was unknown, the technology existed
to make it happen. The stakes for Kennedy were competitive:
During the Cold War, the competition between the U.S. and the
USSR would occur on technological terms that viewed space as a
new frontier.
Members of government sitting with Kennedy in the hot sta-
dium at Rice University that day were well aware that the Presi-
dent sought to motivate a large spending program that would
require Congressional approval. And yet even small children lis-
tening to the speech could clearly understand the power of the
achievement, should it occur: A man on the moon!
It is these characteristics of the Kennedy moonshot speech
that strategists use to craft a moonshot: The goal must be essen-
tial to continuity of purpose; motivated by ambition and com-
petition; inspired and visionary. A moonshot for a successful
established company can be route to renewed leadership under
radically new technological and cultural conditions.
The Roots of Disruption
The idea of disruption originated with theoretical concepts put
forward by economist Joseph Schumpeter in the 1930s, 40s and
50s, which were developed by scholars of technological change
in the 1960s, 70s and 80s. These ideas were rooted in Schum-
peter’s observation that, in many industries, when technological
advances created the potential for business-model innovation,
pioneering firms that had achieved leadership in their industry
were often unable to adapt.
The idea of disruption advanced considerably in 1997, with
the publication of Harvard Business School Professor Clayton
Christensen’s The Innovator’s Dilemma. The key idea in that
book — which had its roots in prior work by Prof. Christensen
8 / Rotman Management Winter 2018
with Joseph Bower and Richard Rosenblum — is that the
leading customers of large organizations often discourage large
companies from adapting technologically. These companies fo-
cus on creating the most value for their key customers, and as a
result, neither large companies nor their customers have an in-
terest in disrupting a system that is working for them. By con-
trast, disenfranchised customers — who are not benefitting from
the established system — have the greatest interest in break-
through innovation.
These ideas are often expressed through the S-curve, such
as the one in Figure One. The vertical axis represents value cre-
ation in an established industry such as mainframe computing,
landline telephones, retail video rental, traditional photograph-
ic film, paper newspapers, defined-benefit pension manage-
ment — or any other business that is (or was) established and
generating revenue.
Different scholars model value creation in this model dif-
ferently. I find the most useful definition to be the one offered
by Adam Brandenburger and Harborne Stuart, who describe
value creation as ‘the difference between total customer willing-
ness-to-pay and total supplier opportunity costs.’ The key insight
here is that value creation reflects the translation by the industry
of inputs into valuable outputs. The horizontal axis represents
time or, in some models, the cumulative investment in research
and development in an industry.
My own 2004 book, How Industries Evolve, describes the
technical elements of this definition in further detail. The
S-curve shape shows that industries generally begin in an entre-
preneurial phase, in which value creation remains relatively low
for a period of time. Once a breakaway firm emerges, the value
created by the industry may rise relatively quickly, especially
as the industry evolves to serve a mass market. Maturity occurs
when the pace of new value creation hits a point of diminishing
returns. This occurs because an industry’s structural capacity to
generate new value is capped by the very insights that led to its
breakout in the first place.
For example, the same systems that were developed in the
1920s to support the emergence of the modern automobile in-
dustry ultimately become limited in their capacity to create new
value. There is only so much value that can be created through
 The S-Curve Model
The industry life cycle as an S-curve
Maturity
Disruption
Value
Creation
Shakeout
Fragmentation
Source: Christensen, The Innovator’s Dilemma
FIGURE ONE
the sale of motorized vehicles powered by combustion engines
sold through franchised dealerships, manufactured in plants
with histories of adversarial management-union relationships,
and supported by a constellation of related industries, such as
gas stations, roadway construction and maintenance, repair
facilities, etc.
An important characteristic of industry maturity is that firms
focus intensively on managing their costs, which they normally
keep low by becoming large enough to achieve economies of
scale in the processes that generate goods and services. Leading
companies in mature industries create value for large numbers
of customers precisely because they have become routinized and
rationalized. The emergence of interlocking systems of relation-
ships, incentives, regulations, activities and assets perpetuates
the industry structure precisely because large numbers of stake-
holders are enfranchised in its success.
So, in short, why does disruption occur? Because of the po-
tential for breaking through the limits on value. Mature indus-
tries are based on approaches to value creation constructed a
generation prior to their maturity, which means that they incor-
porate ideas that are widely accepted, but increasingly outdated.
It is aging ideas, not technologies or incentives per se, that cause
the potential for disruption.
The incentive to disrupt, depicted in Figure Two, reflects
the potential to achieve a major increase in value creation using
ideas, technologies and approaches that break through the limits
on value creation. The potential arises because of the accumu-
lated compromises that customers, suppliers and even the indus-
try itself have made due to the increasingly-outdated approaches
baked into the established industry structure.
The Incentive to Disrupt
Value
Creation
Time
FIGURE TWO
The opportunity for a major breakthrough may rest on tech-
nological advances, but the breakthrough becomes motivated in
particular by an awareness that a new business model is enabled
by technology — new ideas enabled by technology that create so
much more value than the established approach that it is worth
going through the ‘pain’ of disruption.
This pain reflects that the early phases of disruption are
normally unprofitable and fraught with risk. Indeed, a very high
percentage of entrepreneurial ventures fail — by some estimates,
more than 95 per cent. The skills of successful entrepreneurs in-
clude building early wins that can draw important attention and
resources to the venture; failing early, when failing becomes in-
evitable; and learning from failure for future iterations. Because
failure is so pervasive, the first buyers of products and services
may be saddled with expensive and outdated lugs. The absence
of regulation and supporting infrastructure creates other types
of risk as well, including that products produced by the industry
and jobs offered to employees are dangerous.
But if the current regime is bogged down by too many ac-
cumulated compromises, the payoff to successful disruption is
considerable. Pioneering firms that achieve the status of ‘break-
away leaders’ become legendary, often driving so much value
creation that their early owners become wealthy beyond prec-
edent. These are high-risk, high-return enterprises. Established
industries fall into disarray as leaders that once took their longev-
ity for granted become threatened with large losses of revenue
and even bankruptcy; just think back to General Motors, Kodak
and Blockbuster Video.
Organizations that successfully accomplish moonshots
have one thing in common: they are business-model innovators.
rotmanmagazine.ca / 9
 It is aging ideas, not technologies or incentives per se,
that cause the potential for disruption.
Facebook, Netflix, Google and eBay integrated technological
insights into ways of delivering so much value to their stakehold-
ers that they became iconic. But it is not inevitable that the break-
through in value be accomplished by a newcomer or a technology
company. Increasingly, established companies are finding ways
to make moonshots happen by pushing through the limits baked
into their industry structures. Kaiser Permanente, GE, Zipcar,
Charles Schwab and JP Morgan Chase have reinvented them-
selves to drive large-scale increases in value creation that benefit
not only these companies, but also their customers and suppliers.
Disrupting yourself to achieve a breakthrough is among the
most difficult challenges that a successful company can face. The
process of transformation in the organizations that succeed be-
gins with a carefully negotiated and constructed goal—a moon-
shot — and then continues with the relentless and uncompromis-
ing pursuit of that goal, in collaboration with both new and old
stakeholders.
The transition path from the established business to the in-
novative model requires years of painstaking work to renegotiate
contracts, settle old problems, and build trust and capability.
But the work is worth it, precisely because the breakthrough in
value yields a large-scale improvement on fulfilling the organi-
zation’s mission.
Accomplishing this kind of breakthrough requires disci-
pline, commitment, and a mission-driven sense of purpose —
all of which characterized of Kennedy’s vision for reaching the
moon by the end of the 1960s.
The Concept of Future-Back
In a 2013 HBR.org article entitled “What a Good Moonshot is Re-
ally For”, Scott D. Anthony and Mark Johnson explained how
adopting a ‘future-back’ planning horizon is integral to the idea
of the moonshot. Let’s take a closer look at what that means for
the strategy process.
We are learning that the process is most successful when
the moonshot is a loosely held, flexible expression of how the or-
ganization can create value through business-model innovation.
Kennedy’s argument for why the U.S. should invest in sending
a man to the moon rested on the idea that the nation’s very pur-
pose would be fulfilled by the achievement of this goal — and
10 / Rotman Management Winter 2018
that the nation would be put in jeopardy by its failure.
For any organization, the moonshot must rest on fulfillment
of its mission and an awareness of what technology can deliver
on a five- to ten-year horizon. Why five to ten years? This time
horizon is a rule of thumb rather than a hard-and-fast require-
ment. The idea is that it usually takes this long for something
major to happen at the level of a system. In fact, implementing
the change in its entirety may take much longer than ten years;
but five-to-ten years is usually sufficient for a breakthrough. In
1962, Kennedy set the goal for the end of the decade, and it was
July 20, 1969, when Neil Armstrong stepped off the Eagle into
the Sea of Tranquility.
Because business-model innovation is an experimental pro-
cess, and because unknowable technological changes may occur
over the planning horizon, it is impossible to specify the details of
a moonshot with precision. What you need to be is directionally
correct about the details — to be about 75 per cent right — to get
started on a conversation about business-model innovation with
critical stakeholders.
The next step is to identify steps that take you out of the gate
toward achieving the goal. Most established organizations can-
not simply step away from their current commitments and suc-
cesses — and ‘building a bridge as you walk over it’ carries the
risk of being consumed by the day-to-day operational problems
that characterize established business models under the stress of
becoming outdated.
This stress cannot be overstated. Any CEO of a public com-
pany that must deliver on earnings targets — especially if the or-
ganization carries debt and employs a large workforce — faces
unbelievable financial and operational pressure to drive value
out of its established business models. For a leader who has been
charged with stewarding a successful organization into the fu-
ture, it is simply impossible to simultaneously lead responsibly
and walk away from the legacy model.
Yet, at the same time, CEOs must find a way to deal with the
encroaching reality that the ideas that led to the success of their
organization — the technologies, business models and ecosystem
architecture around the firm — are becoming outdated. Because
the problem of innovating at scale is so conceptually challeng-
ing, it can easily become swamped by the problems of making

payroll and fulfilling customer contracts and dealing with short-
term regulatory matters and other critical operational demands.
So, how do you get out of the gate?
What is needed is both a vision for a new system and a process
for migrating from the current system to the new one. Theories from
the fields of entrepreneurship and strategic management offer
insight on how to move forward.
As tempting as it is to contemplate the range of changes that
would make the current system better, that is not the best place
to begin. The reason is that, if you try to build a bridge to a future
that you haven’t yet envisioned, then you will get stuck soon af-
ter you begin. Instead, you need a clear vision for what is possible,
based on new ideas, technologies and processes.
Roughing out the implications of the moonshot for the lad-
der of capabilities, conversations and commitments that the
organization will need is enough to get started. Unforeseeable
changes will inevitably require adjustments on the path toward
realizing the goal, but what is needed in the beginning is to cul-
tivate a shared understanding of what is possible, in principle, to
inspire and guide change. Once that happens, refining the moon-
shot becomes a conversation — a process — that the leadership
team can return to periodically.
Once the moonshot has been envisioned and the path has
been roughed out, how do you move forward? The answer de-
pends on the specific situation facing the organization, of course,
but three critical principles normally emerge.
1. THE LEADERSHIP TEAM MUST FIGURE OUT HOW TO ALIGN THE INTER-
ESTS OF INTERNAL AND EXTERNAL STAKEHOLDERS WITH THE TRAN-
SITION PATH. A breakthrough business model will inevitably
raise questions about the roles of committed stakeholders —
including employees and suppliers — that may not initially
have the capabilities, interest or intention to participate in
the moonshot. How do you get these stakeholders on board?
It is critical at the early stages of a transformation to identify
peoples’ frames of mind; their issues and concerns; and the
expectations of everyone who will be integral to the change.
In my studies of transformation, I have found that great
leaders tend to talk at least as much about how the change
will benefit core stakeholders as about the change itself.
General Electric’s Moonshot
In 2005, former GE CEO Jeff Immelt announced that he
was shifting the company to producing energy-efficient,
ecologically-friendly products, starting with a major invest-
ment in a program called ‘Ecomagination.’ At the time, GE was
not a likely candidate to focus on environmentally-efficient
products: The company was widely believed to be one of the
biggest corporate polluters in the U.S. Skeptical observers
dismissed Immelt’s announcement as a PR ploy designed to
greenwash the company’s poor environmental record.
A true commitment to the Ecomagination moonshot
required GE to reengineer its entire product line for energy
efficiency, including clothes dryers, lightbulbs and jet engines.
Targets were set to double its $700 million research and de-
velopment investment in clean technology; to turn a projected
40 per cent increase in greenhouse gas emissions to a one
per cent reduction by 2012; and to cut its use of water by 20
per cent by 2012.
Ecomagination succeeded well beyond its initial targets.
By 2010, GE had invested $5 billion in clean tech R&D, and by
2015, the program had generated more than $200 billion in
sales. GE beat its environmental targets by a wide margin: By
2015, it had reduced greenhouse gas emissions by 31 per cent
and water usage by 42 per cent. Moonshot achieved.
- from The Moonshot Effect: Disrupting Business as Usual
by Kate Purmal, Lisa Goldman and Anne Janzer
Find Your Moonshot with Five Questions
1. How are the limits to value creation in your business model
anchored in ideas from the past?
2. What new ideas — enabled by current technology and the
aspirations of the next generation of leaders in your organi-
zation—have the potential to shape breakthrough value?
3. What are the implications of your organization’s mission,
values, and purpose in light of these new ideas? If your
organization were unconstrained by the past, what would
be the best way to fulfill its mission over the next five to
ten years?
4. Working with key stakeholders, can you identify an aspira-
tional, inspiring, inspired goal on a five-to-ten year horizon
that will stretch the organization but that, if successful, will
cement its leadership for the future?
5. Is the goal sufficient to drive stakeholders to renegotiate
their engagement with the organization on new terms?
Is there enough value in the goal to go around?
rotmanmagazine.ca / 11
 Motivating change is a complex and harried business that
tends to be most successful when the leadership team op-
erates with both integrity of purpose and compassion about
the discomfort that change inevitably causes.
2. THE TRANSITION PATH SHOULD BE SEEN AS AN ECOSYSTEM AND
PLATFORM PLAY. This idea is a kind of amplification of the
insight at the heart of The Innovator’s Dilemma, which em-
phasized the role of previously-disenfranchised customers
in the innovation process. The key here is to recognize that
your best customers, suppliers, employees and managers
are likely to be disrupted if the business-model innovation
is successful. Some partnerships simply may not be sus-
tainable on the terms of the past, and as a result, new rela-
tionships, commitments and connections are critical to the
process. Establishing a path toward the achievement of a
moonshot requires identifying these stakeholders and seek-
ing their support and engagement, even if this step upsets
and concerns key constituents from the past.
3. SUCCESS REQUIRES SHREWD CONTRACTING AND INVESTMENT. For
the approach to be sustainable, creating new value must
be accompanied by a carefully-crafted strategy for captur-
ing value in the organization. I am not suggesting that in-
vestment can be avoided; quite the contrary. Companies
seeking business-model innovation must be prepared for a
period of investment of resources to build the capabilities
necessary to accomplish the transition. But if this invest-
ment is not accompanied by a thoughtful, well-designed
and strategically insightful approach to contractual arrange-
ments, it will not be sustainable, because an organization
cannot persist in investing without eventually achieving a
fair return on the investment itself. Great transformational
companies such as Netflix, Apple and JP Morgan Chase all
struck deals over time that reflected the risk and effort that
went into the process itself.
12 / Rotman Management Winter 2018
In closing
In the end, the essential elements of the Kennedy Moonshot are
the same elements that are needed to accomplish large-scale
change in an established company: First, the case must be made
that the current system is broken in fundamental ways; the fea-
sibility of a new system must be assured, but held in the back-
ground, given that its precise facets will depend on the resolution
of uncertainties in the future; the potential improvement to value
creation must be significant and visible; and the case must be
made that resources on a large scale should be deployed to as-
sure its achievement.
A goal is only a moonshot goal if it is lofty enough to moti-
vate scientific and organizational achievement through difficult
technical and administrative barriers, and widely embraced by
everyone in the organization. Above all else, the downside risk of
not changing must be made crystal clear.
The good news is, you don’t have to travel to the moon to ex-
perience the moonshot effect: A moonshot is not defined by its dis-
tance from Earth, but by its distance from business as usual.
Anita M. McGahan is the Rotman Chair in Management
and Professor of Strategic Management at the Rotman School
of Management, with cross-appointments to the University
of Toronto’s Munk School of Global Affairs and the Faculty
of Medicine’s Department of Physiology.
Innovations in business
resilience, growth and
profitability

Sustainability Symposium TRANSPARENCY

Innovative strategies for long-term profitability MATTERS
Stay up-to-date on
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and society today. It’s more than just going green — it’s about Ethics Online Course
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17-0637
 The founder of the Creative Destruction Lab
describes its moonshot mission
to create a Canadian AI ecosystem.

Thought Leader Interview:

by Karen Christensen

Describe what happens at the Creative Destruction Lab
(CDL).
The CDL is a seed-stage program for massively scalable science-
based companies. Some start-ups come from the University of
Toronto community, but we now also receive applications from
Europe, the U.S. (including Silicon Valley), Israel and Asia.
We launched the program in September 2012, and each
autumn since, we’ve admitted a new cohort of start-ups into
the program. Most companies that we admit have developed a
working prototype or proof of concept. The most common type
of founder is a recently graduated PhD in Engineering or Com-
puter Science who has spent several years working on a problem
and has invented something at the frontier of their field.
The program does not guarantee financing, but the majority
of companies that succeed raise capital from the CDL’s Fellows
and Associates — a carefully- selected group of individuals who
by companies that went through the Lab. When we finished our
fifth year in June 2017, we had exceeded $1.4 billion in equity
value created.
What exactly does the Lab provide to entrepreneurs?
Start-up founders benefit from a structured, objectives-oriented
process that increases their probability of success. The process is
orchestrated by the CDL team, while CDL Fellows and Associ-
ates generate the objectives. Objective-setting is a cornerstone
of the process. Every eight weeks the Fellows and Associates set
three objectives for the start-ups to achieve, at the exclusion of
everything else. In other words, they define clear goals for an
eight week ‘sprint’. Objectives can be business, technnology or
HR-oriented. Our Fellows and Associates—all volunteers—are
critical to the CDL’s success.
ILLUSTRATION BY DELPHINE LEE

themselves are serial entrepreneurs and early-stage investors.
Throughout the year, our MBA students work with the start-up
founders as part of a second-year elective course, helping them
develop financial models, evaluate potential markets, and fine-
tune their scaling strategies.
To date, more than 100 start-ups have come through the
Lab. When we launched, we set a goal of generating $50 million
in equity value created in terms of the aggregate value created
Tell us more about the CDL Fellows and Associates.
We have designed a marketplace — a community that functions
under a set of rules and norms — that facilitates efficient trans-
actions between first-time founders and experienced entrepre-
neurs, many of whom are also investors. Often, the two sides
don’t know each other until the rookie founder seeks out the ex-
perienced entrepreneur/investor when raising capital. Knowing
very little about the entrepreneur, the investor usually says no,

14 / Rotman Management Winter 2018

 We saw mounting evidence that AI was a general-purpose
technology that can be applied to a wide range of problems.
but occasionally says yes, at which point they are very committed.
By the time we hit the end of the academic year, the Fellows and
Associates have met with the ventures many times, and they’ve
gotten to know each other. Furthermore, the entrepreneurs have
demonstrated their ability (or inability) to deliver against an ag-
gressive set of objectives through several cycles. We don’t require
Fellows and Associates to invest, but they can — and many do.
When you’re founding a company, you’re faced with a thou-
sand different things you could be working on. The question is,
what should you focus on? People who have done this before
are able to triage those thousand things and prioritize the two
or three most important things to focus on right now to increase
value and de-risk the venture as quickly as possible. Every eight
weeks, this group meets with the founders and sets objectives;
then the founders carry on building their ventures.
The CDL does not charge fees or take equity. The currency
for participation is performance. There were seven Fellows in
our first year, so the bi-monthly sessions were named after that
Group of Seven Fellows, or ‘G7’. At the end of each G7 session,
we ask the Fellows and Associates to raise their hand for any
companies for which they are willing to commit their most pre-
cious resource: time. We ask them to commit to meeting with
the company for an hour every other week until the next session.
Any companies that don’t inspire at least one raised hand
are dropped from future meetings — although they are still part
of the CDL family and attend other events. The rule is that at
least one company must be dropped from the G7 sessions at
each meeting. In the rare case that hands go up for all compa-
nies, we raise the price in terms of the amount of time required
to commit. As we proceed throughout the nine-month program,
this allows us to focus more and more resources on ventures that
are showing the most progress.
Three years ago, CDL made a huge bet on artificial intelli-
gence (AI) and machine learning. What prompted that?
In our first year of operation, one of the start-ups that came to us
was Chematria, now called Atomwise. Its founder, Abe Heifets
— a U of T PhD in Computer Science and Biology — was apply-
ing a new AI technique to drug discovery. What Abe was doing
represented not just a marginal improvement, but a potentially
transformative change to the way drugs are discovered — which
represents a multibillion-dollar problem for the pharmaceutical
industry.
While we were working with Abe, a team of graduate stu-
dents from U of T Computer Science won a high-profile com-
petition at Stanford called ImageNet. It’s basically an image-
16 / Rotman Management Winter 2018
recognition competition, whereby a computer is given a bunch
of pictures and has to identify the image, whether it’s a ball, a
horse or a wheelbarrow. This team from Toronto participated,
and not only did they win — using a machine learning technique
called deep learning, largely developed at U of T — but they won
by such a margin that the following year, all of the finalist teams
were using their technique.
Those are just two examples of events that inspired us to bet
on machine intelligence. Overall, we saw mounting evidence
that AI was a general-purpose technology that could be applied
to a wide range of problems across a vast array of industries, and
that’s what prompted us to dedicate a new stream of the Lab’s
activity to AI.
At first, you faced resistance; why?
People said we were being too narrow, that there weren’t enough
startups to fill an AI stream and that there wasn’t enough inter-
est from investors. At the same time, we had believers. One such
believer who herself had written a highly influential blog post de-
scribing the ‘landscape’ of companies emerging in the machine
learning world was Shivon Zilis — a Canadian based in San
Francisco and a partner at the venture investing firm Bloomberg
Beta, where she led the firm’s investments in machine intelli-
gence. I invited her to the Rotman School to present her insight-
ful analysis to our MBA students, and the CDL team — quickly
realizing she is a star — recruited her to join forces on our AI ini-
tiatives. (Elon Musk subsequently saw the same potential and
recruited her to help him build his empire.)
So, we moved forward with the new stream, but to address
these concerns, in 2015 we also launched an annual conference
— with Shivon as co-chair — called Machine Learning and the
Market for Intelligence. The goal was to educate the Canadian
business community about the importance of this emerging
field. Leaders in the field — from organizations like Google,
Uber, Apple, Stanford, Carnegie Mellon and MIT — came to
Rotman to discuss and debate how AI is and will impact a variety
of fields, from life sciences to manufacturing to retail. We held
our third annual conference in October 2017.
Talk a bit about the CDL’s results to date.
The launch of our AI stream transformed the Lab from a Cana-
dian enterprise into a global one. In our first year, our start-ups
were all from Ontario, but they now come from around the
world. Similarly, in our first year, our Fellows were all from
Canada, and that, too, changed when we launched the AI
stream. Our ML7 (Machine Learning Seven) includes William
 The Creative Destruction Lab is home to the greatest concentration
of AI-based companies of any program on Earth.
Tunstall-Pedoe, who flies in from Cambridge, England, every
eight weeks. He has a PhD in Machine Learning and founded
Evi, which was acquired by Amazon in 2012. Evi’s technology
powers the AI engine in Amazon’s Alexa, which, to my knowl-
edge, is still the top-selling consumer AI hardware product in
the world.
The ML7 also includes Barney Pell, who flies in every
eight weeks from San Francisco. Barney also has a PhD in Ma-
chine Learning and led an 85-person team at NASA that flew
the first AI into deep space. He then built an AI company called
Powerset that was acquired by Microsoft, and now he’s the
cofounder of Moon Express, which is essentially building a
Federal Express-type service to the moon, because Barney
believes the moon is going to be an important gateway for com-
mercial space travel.
So far, the results have surpassed our expectations. Back
in 2012, we accepted 25 companies into our general high-tech
stream. Last year, we doubled that by adding the second cohort
focused on AI, so we had 50 start-ups. This year, we doubled our
intake again by accepting 100 AI-focused start-ups and adding
a new stream: The world’s first program focused on launching
startups predicated on quantum machine learning (QML). To
our knowledge, the CDL is home to the greatest concentration
of AI-based companies of any program on Earth.
Among CDL’s ‘graduating’ companies to date, which best per-
sonifies your vision?
We are proud of all of them, and different companies reflect dif-
ferent aspects of our vision. For example, Atomwise personifies
our focus on the application of science that can have a transfor-
mative effect on society. As indicated earlier, it brought in a very
early application of a new branch of Computer Science (deep
learning) and applied it to a commercial focus (drug discovery).
Thalmic Labs captures the scale and ambition of our mis-
sion. They raised their seed financing largely from our G7 Fel-
lows. About a year ago, they raised $160 million in Series B fi-
nancing (US$120 million), which was one of the largest Series B
financings in Canadian history.
UDIO, founded by Katya Kudashkina (Rotman MBA ‘15),
captures the CDL’s entrepreneurial spirit: She immigrated to
Canada without a penny to her name and really hustled to get
into the top business school in the country while studying Eng-
lish at night. When she graduated, she was recruited into a nice,
secure job at the Canadian Pension Plan Investment Board.
She left that job to found a start-up, which she brought to the Lab,
raising a few hundred thousand dollars in investment capital.
Early on, UDIO was focused on building robotic bees for
artificial pollination in the agricultural industry. But the G7 ad-
vised Katya that it was going to take too long to get to revenue
with that business model, and that she needed to be closer to her
customers. So, she packed up her life and moved to California
— essentially living on someone’s couch so she could focus on
almond farmers in Northern California and learn their business
from the ground up.
Ultimately, Katya ran out of capital before she could get to
revenue and the company folded; but she wouldn’t give up and
launched another start-up. She learned a lot from her first compa-
ny and maintained great relations with her investors. I wouldn’t
be surprised if they invest in her again, because she is so driven,
trustworthy and willing to learn. She is a prime example of the
persistence required of entrepreneurs.
As indicated, CDL features collaboration with both current
MBA students and highly successful entrepreneurs. Can you
give an example of a firm that benefited from both?
One example is Validere. One of the co-founders just finished
his PhD at Harvard, where he developed a technique called Op-
tical Liquid Fingerprinting, which identifies the properties of a
liquid. Normally if you want to find out a liquid’s properties, you
take a sample, send it to a lab, and wait for the results. This start-
up developed a process whereby they can essentially determine
the properties of a liquid in real time. They came to the CDL
wanting to sell this service to the luxury perfume industry, to
help detect counterfeit perfumes.
After reviewing their business, the Fellows told the found-
ers that they loved the technology but hated the business idea.
So, the G7 turned to our MBA students and asked them to do
a market analysis to find out where this technology would have
the most value. The MBAs returned with a recommendation to
move from one of the sexiest of all industries — luxury perfume
— to one of the least sexy: oil and gas. And that is what they end-
ed up doing.
One of our Fellows is Dr. Chen Fong, former head of Radi-
ology at the University of Calgary and active investor in medical
technologies as well as the energy industry. After learning about
Validere’s technology and the recommendation to focus on oil
and gas, Chen flew the founders out to Calgary and drove them
(himself!) around the city to meet with a number of oil and gas
executives to solicit feedback on their product.
Soon, the business was transformed: They attracted some
significant customers and went from being unable to raise capi-
tal to being over-subscribed, with more investor interest than
rotmanmagazine.ca / 17
 Our approach is to get ahead, make the investments, and
attract all the elements of the ecosystem to Canada.
they could accommodate. Our MBA students learned a tremen-
dous amount — a very different but complementary type of edu-
cation than they get from reading about historical case studies.
This example epitomizes CDL’s vision: A science-based innova-
tion that will enhance society; created by appreciative, persis-
tent, and coachable founders; national connections, insightful
advice and mentoring from our G7 Fellows; and an incredible
hands-on learning experience for our MBA students.
The Lab is one of the most popular second-year MBA courses
at the Rotman School. Why does it resonate so much with
students?
For two reasons: First, it combines the traditional mode of learn-
ing from lectures with learning-by-doing; and second, it links
academic work with a sense of ownership.
The traditional approach to learning at CDL is led by our
Chief Economist, Professor Joshua Gans, who developed
a structure for teaching entrepreneurial strategy along with
MIT’s Scott Stern. This provides students with an academic
framework and context for what they’re going to experience
next. Then comes the learning-by-doing part. Normally, busi-
ness schools use Harvard Business School cases to provide ex-
amples in the classroom. As indicated, we replace those with
real companies. Working with founders, Fellows and Associates
provides students with an opportunity to roll up their sleeves.
Instead of reading a 30-page case that comes with a fact set,
they have to find the facts themselves and figure out — of the
infinite information out there, which bits are the most valu-
able for their needs? They experience the messiness of the real
world and the reality of having to make decisions without hav-
ing full information.
The second piece is ownership. When our students work
with these start-ups, every decision matters, so they have a real
sense of ownership. It’s a powerful learning experience to feel
ownership over the results because the consequences are so
tangible.
Universities rarely adopt programs developed elsewhere.
What motivated the University of British Columbia, New York
University, the University of Calgary, Université de Montreal
and Dalhousie University to adopt the Creative Destruction
Lab program?
Every university has a program or course on entrepreneurship
and start-ups, but I think the CDL stands out due to its significant
results. The calibre of investors from the business community
who have rallied around the CDL is unprecedented. Naturally,
18 / Rotman Management Winter 2018
other universities would love for that to happen at their own busi-
ness schools.
When UBC indicated interest in adopting the program, the
big question was, ‘Is this replicable?’ But a very competent team,
under the direction of Professor Paul Cubbon, was able to re-
produce it. When CDL-West completed its first year, the results
on all dimensions were impressive, and we had evidence that,
yes, this program is replicable. We have since launched CDL at
the University of Calgary, Dalhousie University and Université
de Montreal, and in October, we announced a partnership with
New York University’s Stern School of Business.
CDL Toronto’s competition is not Vancouver, Calgary,
Montreal, New York or Atlantic Canada: it’s Silicon Valley. Each
of the CDLs has attracted some of the top business people from
its region. Our challenge now is to cross-pollinate, so that the
Montreal Fellows are connecting with companies in the Toronto
program and the Toronto Fellows are connecting with compa-
nies at CDL Atlantic, and so on. One of the things that makes the
Bay Area so effective is that everything moves so fast. If we can
accelerate the velocity of business development here, we will
have raised Canada’s game as a whole.
You mentioned earlier that CDL launched the world’s first pro-
gram focused on quantum machine learning (QML). What is
your vision for this initiative?
It’s a bold one: By 2022, the QML Initiative will have produced
more well-capitalized, revenue-generating quantum machine
learning-based software companies than the rest of the world
combined, with the majority based in Canada.
Why QML? First, we can leverage the leadership that CDL
currently has in the commercial application of machine learn-
ing. Second, we can leverage Canada’s leadership in quantum
computing at places like the Perimeter Institute and the Insti-
tute for Quantum Computing in Waterloo, Université de Sher-
brooke in Quebec, and D-Wave in Vancouver, among others.
Third, we can leverage the network of investors, entrepreneurs,
scientists, and corporations that have rallied around the CDL
and our mission of commercializing science for the benefit of
humankind. [Editor’s Note: For details on the QML program,
visit creativedestructionlab.com/locations/Toronto/quantum.]
Clearly, the CDL is leading the way in this arena.
I believe so. Three years ago, it felt like we were moving early on
AI, but we realize now that — if we could turn back the clock — we
actually should have started even sooner and moved faster. We
were roughly a year ahead of everyone else, but now a number of
 With QML, we want to do in Toronto what Silicon Valley
did with semiconductors in the 1960s.
programs in other countries are focused on AI startups — so we’re
running fast just to keep our position.
In terms of QML, so far we’re the only ones doing it, and
that’s because the technology is so embryonic. We might go for
two or three years without a significant success, because we
might be too early. The point is, once there’s a hit, places like
MIT, Stanford and Silicon Valley will all double down in this
field. Our approach is to get ahead, make the investments now,
and attract all the elements of the ecosystem to Canada.
We want to do in Toronto with QML what Silicon Valley did
with semiconductors in the 1960s. There’s nothing inherently
magical about Silicon Valley. The semiconductor industry hap-
pened to start there due to the pioneering efforts of a handful of
people, and once that community grew big enough, it became
very hard for other regions to compete. Our view is, if we can
seed it here and if the industry takes off five years from now, by
that time, Canada will have such a critical mass that it will be
hard for the whole community to move somewhere else. We’re
trying to plant the seeds now.
Already, three top Silicon Valley venture capitalists are suf-
ficiently optimistic about this program that they offered to in-
vest in every one of the companies that gets into it — sight un-
seen. Most of these companies won’t make it — and they know
that — but they want to be involved because along the way, they
will get an education in QML, and there is some positive prob-
ability that one or two of these companies will figure out a com-
mercial application.
Globally, what has been the reception to AI?
Earlier this year, the Canadian government made a series of fi-
nancial commitments to attempt to maintain its position as a
leader in AI research. In July, China announced a long-term AI
plan that dwarfs Canada’s investment and specifies a timeline
through 2030 during which China aims to become the world
leader in AI. Over the Labour Day weekend, Russian President
Vladimir Putin foreshadowed significant investments when he
stated: “AI is the future, not only for Russia, but for all human-
kind. Whoever becomes the leader in this sphere will become the
ruler of the world.”
There has also been caution: Tesla CEO Elon Musk has
made pleas for governments to take AI safety seriously and to set
up regulatory bodies to manage it. His Twitter response to Pu-
tin’s remarks was: “It begins…,” which he followed with: “China,
Russia, soon all countries w strong computer science. Competi-
tion for AI superiority at national level most likely cause of WW3
imo.” Musk is concerned that AI is developing more rapidly than
we realize and that there is significant risk to human civilization.
He feels it needs to be regulated, not unlike communications, air
traffic, financial services, healthcare and aerospace.
Will AI change the way decisions are made in organizations?
Yes. Every disruptive technology lowers the cost of something,
and in the case of AI, that something is prediction. By prediction,
I mean using data that you have to generate data that you don’t
have. Economic theory tells us that as the cost of machine pre-
diction falls, we will use more of it. Prediction is an input to de-
cision-making under uncertainty. When faced with uncertainty,
we need to predict the likelihood of different outcomes when we
make a decision. As machine prediction becomes cheaper, we’ll
increasingly substitute human prediction for machine prediction
in the decision-making process.
However, prediction is not the only ingredient for decision-
making. Judgment — the assignment of value or payoffs to pos-
sible outcomes — is also important. Machines do prediction, but
only humans have judgment. I anticipate that organizations will
engage in much more decision-making because a key ingredi-
ent is now much cheaper, and the value of human judgment will
increase, as we demand more of it. We can only speculate on the
aspects of judgment that will be most valuable, but things like
ethical judgment, emotional intelligence and artistic ability are
likely suspects.
Ajay Agrawal is the Peter Munk Professor of Entrepreneurship, Professor
of Strategic Management, and founder of the Creative Destruction Lab at
the Rotman School of Management. He is also cofounder of Next Canada,
which includes Next AI, a not-for-profit program to inspire young entrepre-
neurs and technologists to explore commercial opportunities that are a direct
result of advances in AI. Along with Rotman Professors Joshua Gans and
Avi Goldfarb, he is co-author of Prediction Machines: The Simple Economics
of Artificial Intelligence (forthcoming, Harvard Business School Press,
April 2018). For more on the book visit predictionmachines.ai
rotmanmagazine.ca / 19
 The Future of Growth:

A new factor of production is on the horizon, and it promises to

transform economic growth for countries around the world.
by Jodie Wallis and Deborah Santiago

IN THE MODERN ECONOMY, there are two traditional drivers of pro-
duction: increases in capital investment and labour. However, the
decades-long ability of these drivers to propel economic progress
in most developed countries is on the cusp of a massive change.
With the recent convergence of a transformative set of tech-
nologies, economies are entering a new era in which artificial
intelligence (AI) has the potential to overcome the physical limi-
tations of capital and labour and open up new sources of value
and growth. AI is, without question, the single most disruptive
technology the world has experienced since the Industrial Rev-
olution. In this article we will discuss some of the implications,
challenges and opportunities of this new fact of economic life.
A New Factor of Production
For three decades, rates of gross domestic product (GDP) growth
have been shrinking across the globe. Key measures of economic
efficiency are trending sharply downward, while labour-force
growth across the developed world is largely stagnant.
Are we experiencing the end of growth and prosperity as we
know it? The short answer is an emphatic No, because the data
misses an important part of the story: How new technologies af-
fect growth in the economy. Traditionally, growth has occurred
when the stock of capital or labour increased, or when they were
used more efficiently. The growth that comes from innovation
and technological change in the economy is captured in total
factor productivity (TFP). Economists have always thought of
new technologies as driving growth through their ability to en-
hance TFP, and this made sense for the technologies that we
have seen — until now.
What if AI has the potential to be not just another driver of
TFP, but an entirely new factor of production that can replicate
labour activities at much greater scale and speed, and even per-
form some tasks beyond the capabilities of humans?
For example, Meta — now part of the Chan Zuckerberg Ini-
tiative — uses AI to read, understand and act on the thousands
of scientific papers that are published daily. For context, over

rotmanmagazine.ca / 21
 AI can boost labour productivity only if companies
are willing to disrupt their legacy models.
4,000 papers are published daily in the field of biomedicine
alone. Meta’s system helps scientists access these mountains of
research to learn from real-time insights and unlock scientific
discoveries years in advance.
Unlike traditional capital like machines and buildings, AI
can improve over time, thanks to its self-learning capabilities.
The Spanish AI start-up NEM Solutions, using an algorithm
based on the human immune system, is targeting wind-farm
productivity by predicting and preventing failures. The platform
first analyzes instances of wind turbine failure to learn what the
symptoms are, then monitors the turbines in real time to detect
the symptoms and flag any potential problems.
Of course, AI is not a new field; much of its theoretical
and technological underpinning was developed over the past
70 years. Its applicability, though, is a relatively modern devel-
opment. AI went out of favour in the 1970s and 1980 because
technological capabilities such as limited computing power fun-
damentally limited the capabilities of researchers. That changed
in the early 2000s, when three Canadian-based researchers —
Geoffrey Hinton, Yoshua Bengio and Rich Sutton — made
breakthroughs that re-popularized the study of AI.
Over the last ten years, increases in efficient computing
power, data quality and data quantity have redefined how we
look at AI. Today, the term refers to multiple technologies that
can be combined in different ways to sense, comprehend and act.
All three capabilities are underpinned by the ability to learn from
experience and adapt over time.
SENSE. Computer vision and audio processing, for example,
perceive the world by acquiring and processing images, sounds
and speech to develop enhanced data.
COMPREHEND. Natural language processing and recommendation
engines, for instance, can analyze and understand the data col-
lected by generating meaning and insights.
ACT. One of the key components of AI systems is their ability to
use the information generated to take action like in the case of
augmented reality or, more simply, chatbots.
22 / Rotman Management Winter 2018
Five Levers of AI-Led Growth
So, how can organizations drive value from AI? Businesses that
successfully apply it could increase profitability by an average of
38 per cent by 2035, according to a recent research report we did
in conjunction with Frontier Economics. That’s a compelling
case. We think about AI delivering value in terms of five levers:
1. INTELLIGENT AUTOMATION. This involves deploying cognitive
capabilities on top of traditional automation technologies
to achieve self-learning, greater autonomy and flexibility.
Results include more efficient processes, activities, and ser-
vices beyond what traditional automation will deliver.
2. IMPROVED INTERACTIONS. This involves delivering superior
experiences to customers and users based on hyper-person-
alization and the curation of real-time information. On top
of overall satisfaction improvement, this can also generate
greater acquisition and retention rates among customers.
3. ENHANCED JUDGMENT.Leveraging AI capabilities to augment
human analytical and management capabilities. Results in-
clude improved quality and effectiveness of prediction and
decision making.
4. DEEPENED TRUST. AI can be used to build trust with custom-
ers and within the organization by more effectively prevent-
ing and detecting anomalies. It also provides the ability to
significantly reduce false positives, which further improves
efficiency.
Deploying AI to enable a new class of
5. INNOVATION DIFFUSION.
products and services that use AI to enhance the product de-
velopment lifecycle and create new businesses. Results in-
clude increased speed with which new products and services
are designed and delivered.
Let’s look at a few examples. The aircraft manufacturer Airbus
was looking for ways to achieve more accuracy and quality
in cabin furnishing. Accenture worked with Airbus to develop
a solution involving smart glasses. Using contextual marking
instructions, the smart glasses display all required information
for an operator to help mark the floor faster and reduce errors
to zero, with a built-in ability to validate the work and provide
real-time feedback to users along the way. You can imagine the
applicability to many operations that require precision in the set
up or implementation of equipment.
In California, AI start-up Elementum generates real-time
insights when incidents or disruptions threaten a supplier, help-
ing its clients understand where every component and finished
good is supplied, manufactured and distributed. Rather than
simply automating supplier management processes, clients of
Elementum can get early warnings of potential problems and
alternative solutions to react before production is impacted. For
instance, in 2014 a fire in a Chinese DRAM [Dynamic Random-
Access Memory] chip factory put a 25 per cent squeeze on world
supply. Whereas most equipment manufacturers only found
out days later, Elementum’s customers knew about the incident
within minutes and secured their supply of DRAMs before prices
reacted to the shortage.
It is not just production and supply chains that can benefit
from intelligent automation. One of Accenture’s clients — a glob-
al insurance company — wanted to automate its claims process-
ing for auto insurance. We worked with them to develop an al-
gorithm using a data set of toy-car images. The solution enables
customers to send their own pictures of the damaged car to the
insurer, and the algorithm classifies the damage, replicating the
work of an adjuster, with 90 per cent accuracy. In addition to re-
ducing the effort of humans in assessing the damage, the solu-
tion can also be extended to requisition parts and detect poten-
tial fraud cases.
Elsewhere, in March, Capital One revealed Eno, the first
of its kind natural language chatbot for banking. During the
pilot phase, customers could text Eno anytime to review their
accounts, pay their credit card bill, or just ask general questions.
As of this month, Eno is available to communicate by text with
millions of Capital One credit card and bank customers. Capi-
tal One has revealed three surprising things it learned in the
pilot process:
• Every customer has their own language and conversational
style. Therefore, the agent had to learn how different people
like to text about their money. This includes the use of emo-
jis. For example, some customers like to use a thumbs-up
emoji to confirm their payment;
• Language, tone and meaning trainers have been required to
help Eno interpret the 2,200 different ways customers may
ask for their balance;
• And chatbots actually need empathy! People will tend to
build relationships with them even while knowing that they
are talking to a bot.
However, improved interaction is not just about interact-
ing with customers. One of the world’s largest oilfield services
companies — which creates products and services to analyze,
drill, evaluate, complete and produce oil and gas reserves and
then transport and refine the hydrocarbons — wanted a way to
respond more efficiently to its vendors’ inquiries about their in-
voices and payments. Vendors can interact with a digital assis-
tant and receive information about the status of their invoices.
This includes checking invoice status, and searching for invoices
in back-end systems. Vendors can also use the virtual agent to up-
load missing invoices and log trouble tickets.
A key use case for enhanced judgment is in recommender
systems. Machine learning and deep-learning models have been
used to personalize recommendations for movies, research ar-
ticles and products in general, and there are now recommender
systems for experts, collaborators, job candidates and romantic
partners. Canadian company Layer 6 recently won an interna-
tional challenge for its work on ‘cold-start’ recommendation
systems — cases where there is no interaction history to draw
from. Layer 6’s deep learning platform allows users to leverage
a wide variety of historical data and solves the cold-start prob-
lem by incorporating data from the current user session and
context.
AI is also spreading to areas where intellect and critical
thinking have long dominated. For instance, start-up Narra-
tive Science is ‘humanizing’ data with technology that inter-
prets an organization’s data, then transforms it into intelligent
rotmanmagazine.ca / 23
 One third of the skills that will be required in three
years are not yet considered crucial.

Emerging AI Technologies
their function, cost and material according to specified crite-
AI Technologies Illustrative Solutions ria. In the healthcare industry, Dreamcatcher has already been
Computer Vision Virtual used to design a facial implant that accelerates recovery and tis-
Audio Processing Agents sue regrowth.
Sense
Identity Factoring in AI
Analytics
To understand the value of AI as a new factor of production,
Accenture, in association with Frontier Economics, modelled
Cognitive the potential impact of AI for 12 developed economies that to-
Robotics
Natural Language Processing gether generate more than half of the world’s economic output.
Knowledge Representation
Speech
Our results reveal unprecedented opportunities for value cre-
Comprehend Analytics ation: AI has the potential to double annual economic growth
rates across these countries. In Canada, the increased labour
Recommendation productivity that AI offers could potentially reduce the number
System
of years required for Canada to double the size of its economy by
13 years if it achieves an AI-steady state by 2035.
Machine Learning Data AI also has the potential to boost labour productivity by up to
Expert Systems Visualization
40 per cent by 2035 in the countries we studied. Optimal labour
Act productivity will not be driven by longer hours, though, but by
innovative technologies enabling people to efficiently use their
Source: Accenture Analysts time. This labour productivity increase dramatically reduces the
FIGURE ONE number of years required for our analyzed countries’ economies
to double in size. The results are primarily driven by a country’s
ability to diffuse technological innovations into its wider econom-
ic infrastructure. While the gains vary in each country surveyed,
narratives in a style that a human might write. Take, for exam- our research shows AI can transcend regional and structural dis-
ple, the suspicious activity reporting AML [anti-money-launder- parities, enabling huge, rapid leaps in labour productivity.
ing] investigators are required to do. For a large bank that aver- AI can boost labour productivity, though, only if compa-
ages 4,000 alerts a year, typically over 150 cases need to be filed nies are willing to disrupt their legacy models. An Accenture
with regulatory bodies. Narrative Science’s platform, Quill, can study found that companies that optimally use AI will generate
reduce the time it takes to file cases by automating the narra- higher shareholder value. However, less than a fifth of leading
tive required that explains the suspicious transactions, saving companies that leverage AI have achieved this performance.
2.5 hours per case. Accenture’s research found that only 17 per cent of Canadian
California AI company Autodesk is pioneering this approach companies leverage AI successfully — demonstrating the ability
with its computer-aided design system, Dreamcatcher. Using AI to innovate from within and collaborate externally. The research
to mimic the generative design work of nature, Dreamcatcher shows that companies must converge and integrate technology,
creates thousands of virtual prototype iterations and compares data and people to improve what we call their ‘AIQ’.

24 / Rotman Management Winter 2018

 The Economic Impact of AI
AI has the potential to double annual economic growth rates in the countries that we analyzed in terms of gross value added
( a close approximation of GDP).
4.6
Baseline AI Steady State
4.1
3.9
3.6
3.2
3.0 3.0 2.9
2.6 2.7 2.7
2.5 2.5
2.1
1.7 1.8
1.7 1.6 1.7
1.6
1.4 1.4 1.0
0.8

United Finland United Sweden Netherlands Germany Austria France Japan Belgium Spain Italy
States Kingdom
Real gross value added (GVA) (%, growth)
Source: Accenture and Frontier Economics

FIGURE TWO

Clearing the Path to an AI Future
Entrepreneur Elon Musk has warned that AI could become hu-
manity’s ‘biggest existential threat’. The more optimistic view
of futurist Ray Kurzweil is that AI can help us to make ‘major
strides in addressing the [world’s] grand challenges’.
The truth is, it all depends on how we manage the transition
to an AI economy. To fulfill the promise of AI as a new factor of
production that can reignite economic growth, relevant stake-
holders must be thoroughly prepared — intellectually, techno-
logically, politically, ethically and socially — to address the chal-
lenges that arise as AI becomes more integrated into our lives. A
good starting point is understanding the complexity of the fol-
lowing issues.
PREPARING THE NEXT GENERATION FOR THE AI FUTURE. There are three
things we need to do to create the AI workforce of the future:
accelerate the re-skilling of employees; unlock human potential;
and strengthen the talent pipeline. These actions will enable
leaders to build on a workforce that is already highly engaged
with new technologies in their daily lives. And these leaders will
reshape their organizations to allow workers to flourish in an AI
economy in a way that drives real business value as well as in-
novation and creativity.
An example of using AI to power re-skilling is Montreal’s
Erudite AI, which is tackling the human issue of academic and
career stagnation due to a lack of productivity and learning. Eru-
dite uses AI to augment human collaboration and knowledge
sharing at work or school. Unlike other such tools, its knowledge
management system enables individuals to amplify and share
their expertise through the power of human collaboration. It op-
timizes knowledge transfer and skill augmentation by mapping
— in real-time — unique knowledge and skill profiles of learn-
ers and matching them with the right expert at the right time. It
also provides coaching and collaboration among experts within
the platform to instantly enhance the quality of responses. Ulti-
mately, companies must make radical changes to their training,
performance and talent acquisition strategies. Re-skilling should
be viewed as a new way of thinking about continuous education,
as one third of the skills that will be required in three years are
not yet considered crucial.
AI will be instrumental in not only making existing workers
more productive, but also in helping them deliver better work.
This involves fostering a culture of lifelong learning, much of it
enabled by technology, such as personalized online courses that
replace traditional classroom curricula and wearable applica-
tions such as smart glasses that improve workers’ knowledge and
skills as they carry out their work. Success will also depend on
partnerships with start-ups, universities and individual experts
to access knowledge and skills at scale.
In preparation for the AI economy of the future, countries
need to do better in aligning their education systems with the
needs of the new economy and forging partnerships between
institutions and industry. This means enhancing primary and
secondary programs, college programs and undergraduate pro-
grams with content in critical thinking, creativity, math, robot-
ics and human-machine interaction, as well as continuing to

rotmanmagazine.ca / 25
grow post-graduate programming. This will require extending
the learning cycle beyond traditional timeframes and into the
workplace.
Last fall, Quebec’s Quartier Innovation and the École
de Technologie Supérieure announced a partnership with
Vidéotron and Ericsson to create an ‘open laboratory’ for smart
technology to unite the telecom and manufacturing industries,
municipalities and advanced learning in the creation of new
technologies. Governments are also beginning to understand the
importance of collaboration in AI. Earlier this year, the govern-
ments of Ontario and Quebec signed a memorandum of under-
standing (MOU) to work together to foster AI development. The
MOU aims to keep Ontario, Quebec and, more generally, Cana-
da competitive among other jurisdictions both in the expansion
of fundamental knowledge and in the widespread development
and application of these technologies. One of the important ways
they want to achieve this is by bolstering ties between research
and industry and between technology companies and start-ups.
ENCOURAGING AI-POWERED REGULATION. As autonomous machines
take over traditionally human tasks, current laws will need to
be revisited. For instance, the State of New York’s 1967 law that
requires drivers to keep one hand on the wheel was designed to
improve safety, but may inhibit the uptake of semi-autonomous
safety features, such as automatic lane centralization. In other
cases, new regulation is called for. For example, though AI could
be enormously beneficial in aiding medical diagnoses, if physi-
cians avoid using these technologies, fearing that that they will
be exposed to accusations of malpractice, this uncertainty could
inhibit uptake and hinder innovation.
AI itself can be part of the solution, though, creating adap-
tive, self-improving regulations that close the gap between the
pace of technological change and that of regulatory response. For
example, AI could be used to update regulations considering new
cost-benefit evaluation.
ADVOCATING A CODE OF ETHICS FOR AI. Intelligent systems are rap-
idly moving into social environments that were previously exclu-
sively human, opening up ethical and societal issues that could
slow AI’s progress. These range from how to respond to racial-
ly-biased algorithms to whether autonomous cars should give
preference to their driver’s life over others in the case of an ac-
cident. Given AI’s rapid growth, policymakers need to ensure the
development of a code of ethics for the AI ecosystem and ethical
debates need to be supplemented by tangible standards and best
practices in the development of intelligent machines.
26 / Rotman Management Winter 2018
ADDRESSING THE REDISTRIBUTION EFFECTS. Many people are con-
cerned that AI will eliminate jobs, worsen inequality and erode
incomes. This explains the rise in protests around the world and
discussions taking place in several countries around the intro-
duction of a universal basic income. Policymakers must recog-
nize that these apprehensions are valid. Their response should
be twofold.
First, policymakers should highlight how AI can result in
tangible benefits. For instance, an Accenture survey highlighted
that 84 per cent of managers believe machines will make them
more effective and their work more interesting. Beyond the
workplace, AI promises to alleviate serious global issues such as
climate change and poor access to healthcare. Benefits like these
should be clearly articulated to encourage a more positive out-
look on AI’s potential.
Second, policymakers need to address and pre-empt the
downsides of AI. Some groups will be affected disproportionate-
ly by these changes. To prevent a backlash, policymakers should
identify the groups at high risk of displacement and create strate-
gies that focus on reintegrating them into the economy.
In closing
Increases in capital and labour are no longer driving the levels
of economic growth that the world has become accustomed to.
As indicated herein, a new factor of production is on the horizon.
AI promises to transform the basis of economic growth for coun-
tries around the world.
To avoid missing out on this opportunity, policymakers
and business leaders alike must work towards a future with
artificial intelligence. They must do so not with the idea that AI
is simply another productivity enhancer; rather, they must see
AI as a tool that will transform our thinking about how growth
is created.
Jodie Wallis is Managing Director and
Artificial Intelligence Lead at Accenture
Canada. Deborah Santiago is Global
Legal Lead of Accenture’s Digital & Strategic
Offerings legal team, which includes
Analytics, Interactive, Mobility, Cloud and Software.
Transform Business
What does AI mean for businesses big and small? What key opportunities
and challenges does it present? Two experts on the topic weigh in:
Rotman School Dean Tiff Macklem and Scotiabank CTO Michael Zerbs.
Interview by Richard Piticco, CPA, CA

We hear so much about artificial intelligence (AI) these days,
but many leaders are at different levels in terms of under-
standing what it means for business. What do they need to
know?
MICHAEL ZERBS: First of all, I want to be clear about something: AI
is already here. You are using AI whenever you type a message
on your iPhone and a word gets auto-completed; whenever you
type a word into a search engine and it magically completes itself;
and whenever you use Google Translate. These are all AI appli-
cations, and they share two key characteristics.
In each case, it’s about a machine/agent perceiving its en-
vironment. If it were a real, natural intelligence such as you per-
ceiving the environment, that would entail using your eyes and
ears; but because it’s a machine doing the perceiving, it uses
sensors and algorithms. Once the environment is perceived, the
agent takes an action that is orientated towards a distinct goal.
That goal could be ‘completing the word that you had in mind’
when you started to type; or it could be ‘autonomously driving a
car from point A to point B’ in a reasonable amount of time, with-
out causing an accident. So, the key characteristics of AI are that
a machine perceives the environment and then takes actions to
optimize a particular goal.
Leaders should also be aware of machine learning — a
branch of AI that ‘creates’ intelligence by learning from data. It’s
a way to take a lot of data and extract useful information to help
us achieve a goal. Computers have become extremely powerful:
Things that were once theoretically possible were only possible if
you were willing to wait for a very long time; all of a sudden, you
can do these things very quickly.
Tiff, the University of Toronto — and the Rotman School in
particular — have done some interesting research around the
economic consequences of AI. Can you talk a bit about this?
TIFF MACKLEM: What is so interesting about AI is that it’s not an in-
vention like, say, insulin. Insulin was a hugely important innova-
tion that has massively improved the quality of life for diabetics
— but it’s not something that you can take and apply to all sorts of
things. AI is more of a ‘general purpose technology’: It has wide-
ranging applications, and we are only just starting to see what
those are.

rotmanmagazine.ca / 29
 Innovation improves our lives; but at the same time,
it can destroy a lot of value.
The way economists think about AI is, we ask, ‘What does
it actually do?’ Like any disruptive technology, it dramatically
drops the cost of something — and in our view, that something
is prediction. Take the analogy of computers. What they dramati-
cally reduced the cost of was arithmetic — and as a result, things
that involved a lot of arithmetic were quickly automated. Next,
people began to realize that there were lots of problems that we
didn’t necessarily think of as arithmetic problems that could be
made into arithmetic problems.
For example, we used to take photos on analog cameras us-
ing Kodak film, then take the film to Blacks to be developed via
a chemical process. One day, someone said, ‘You know what?
Given that arithmetic is so cheap now, maybe we could produce
photos digitally’. All of a sudden, we were taking more pictures
than ever before — and Kodak and Blacks went bankrupt.
As in the case of computers, with AI, the initial applications
we are seeing are very obvious things. So, based on your previous
patterns, Netflix uses AI to predict which movies you might like
to watch, and Amazon uses it to predict which books you might
want to buy. These applications are handy — but hardly transfor-
mational.
However, we are starting to see more meaningful applica-
tions. For example, in healthcare, AI applications are dramati-
cally dropping the cost of diagnosis. Say you notice a new mole
on your arm: Is it just a sun spot, or is it a melanoma? You can now
take a picture with your phone and an AI algorithm can tell you.
That is going to lead to better health outcomes. The way to think
about AI is, it’s a very powerful prediction engine — and the uses
we’ve seen to date are just the tip of the iceberg.
Tiff, within five years, the Rotman School’s Creative Destruc-
tion Lab (CDL) has far exceeded your expectations. Can you
give us some background on it, and some idea of what is com-
ing down the pipeline?
TM: The name for the Creative Destruction Lab comes from
economist Joseph Schumpeter, who was one of the first to think
deeply about the process of innovation. He coined the term ‘cre-
ative destruction’ to capture the idea that innovation creates new
inventions that improve our lives; but at the same time, it can
destroy a lot of value and put people out of work. So, there are
30 / Rotman Management Winter 2018
positives and negatives to innovation.
The fundamental insight that led us to launch the CDL was
this: We have great science in Canada, but historically, we have
done a lousy job of commercializing it and reaping the economic
benefits. Too often, the pattern goes something like this: Cana-
dian scientists invent something amazing, and an American en-
trepreneur develops it into a product and reaps all the economic
benefits. Our insight was that there is a market failure in what we
call ‘the market for judgment’. The problem for a new entrepre-
neur is, we’ve got great scientists coming up with amazing inven-
tions — but they don’t know the first thing about whose problem
it could solve, or how to start-up and scale a business. Most of
what occurs between invention and revenue is management.
Rotman Professor Ajay Agrawal’s founding vision for CDL
was to attract really promising deep science-based ventures, and
connect them with some of Canada’s most successful entrepre-
neurs to resolve the failure in the market for judgment. These
mentors are people like Tony Lacavera, who founded Globalive
Holdings; Ted Livingston, who started Kik; and John Francis,
who started Grounded. They come in and volunteer their time,
and we connect them to promising science-based ventures. Our
MBA students also do pro bono work for these ventures, adding
the required capacity and analytics to figure out who the cus-
tomer is, how the initiative should be financed, and how it can
be scaled. This gives Rotman students a unique entrepreneurial
experience at the frontier of new technology.
This formula has been hugely successful: Five years ago, we
set a goal of the ventures going through creating $50 million dol-
lars of equity value. Today, we’re closing in on $1.5 billion dollars
of equity value created. Of course, this is notional — they haven’t
exited; that’s based on the money they’ve raised.
We recently expanded beyond the University of Toronto:
About a year ago we partnered with the University of British
Columbia to create a CDL at the Sauder School of Business;
last spring we announced partnerships with Dalhousie’s Rowe
School of Business, HEC in Montreal and the Haskayne School
at the University of Calgary. And in October, we announced a
partnership with NYU’s Stern School of Business. The successful
entrepreneurs — or Fellows, as we call them — who mentor CDL
ventures come from Canada and beyond: People like Barney
Pell, who holds a PhD in Machine Learning and led the NASA
team that flew the first AI into deep space; and Shivon Zilis, who
founded Bloomberg’s AI investment arm, Bloomberg Beta.
About three years ago, when we decided to really focus
on AI at Rotman, it was a case of coming back to where it all
started. The University of Toronto is home to Geoffrey Hinton
— a Computer Science professor who is one of the pioneers and
global gurus of artificial intelligence. Around 2012, Prof. Hinton
and his team of PhDs started winning lots of global prizes in AI
— particularly around picture recognition, which is a classic AI
problem. All of a sudden, Silicon Valley leaders were coming up
to Toronto to hire many of his PhD students. These people are
now running the AI labs at Apple, Google, Uber and Facebook.
So, this is another sad Canadian story, because the Canadian
government actually funded a lot of this research — through
what is known as the ‘AI winter’, when progress was very slow.
Suddenly, Prof. Hinton’s team started hitting home runs, and
Silicon Valley swooped in.
For the students and professors who want to stay in Toronto,
we want to help them start and grow their businesses right here.
We’ve now got 100 AI-oriented companies going through the Lab
each year. As far as we can tell, it’s the biggest concentration of AI
ventures of any program in the world. And instead of Silicon Val-
ley stealing our talent, its leaders now fly up to Toronto regularly
for CDL meetings, because they want to invest in these ventures.
Can you describe what these ventures look like?
TM: Every year we are seeing an ever-broadening sweep of ap-
plications across sectors. In the beginning, many ventures used
AI to predict some sort of fault or malfunction: Think of possible
problems with cars, planes, trains, drones, pipelines or any kind
of big machine. How many times have you gone to the airport
gate and you hear, ‘We have a mechanical problem; there’s go-
ing to be a delay.’ This costs the airlines billions of dollars every
year, and it’s a huge inconvenience for travelers. If they could
do a better job of predicting these problems, air travel would be
much more pleasant and safe, and the airlines would dramati-
cally drop their costs.
At CDL recently, we’ve been seeing all sorts of applications
in healthcare, including new types of diagnostics that are up to
100 times cheaper than what we use today, and applications for
more personalized medicine. The reality is, people react differ-
ently to different drugs and treatments — and AI can predict how,
say, a particular cancer patient will react to a certain treatment.
These are just some examples. There are many more I could
talk about, but what I would underline is that the only limitation
is our imagination.
Michael, Scotiabank is one of the CDL’s partners, but you
are also involved with the Vector Institute and NextAI. Tell us
about the strategy for these partnerships.
MZ: A few years ago, we recognized that the world was moving so
fast in terms of advancements in AI and related fields, that there
was no way for us to ‘know it all’ internally. So, in Scotiabank-
speak, we took an ‘outside/in perspective’. Large enterprises of-
ten think that only people who grew up in the organization know
best; but we knew that wasn’t the case.
In terms of strategy, the main reason for our partnerships is
simple: Gaining access to new ideas. Even though many AI ideas
don’t directly relate to finance, you can often look at, ‘What are
these entrepreneurs and scientists trying to achieve?’ and figure
out the ‘finance equivalent’ of that. It could be around finding
anomalies, detecting patterns, or just reducing the cost of predic-
tion at some level.
The second point is equally important to us: There is a mas-
sive talent shortage right now, in terms of people who under-
stand AI and can apply it. At the scientific level, how do you prac-
tically apply deep learning algorithms? And at the business level,
once you’ve got the tool, how can you use it in a transformational
sense? We thought, we can sit here all day and complain about
all the change taking place — or we can team up with great insti-
tutions like Rotman and initiatives like NextAI and do something
about it. Canada has a great opportunity to be a leader in the AI
realm, and we want to be part of that.
The third aspect is, while a lot of advances have been made,
what academia often really needs are practical-use cases. It is
very difficult to get access to real-world data. The good news is,
banks collect a lot of data; the bad news is, it gets trapped in silos,
because historically, banks have operated in silos.
To combat this, we have started several initiatives. For
rotmanmagazine.ca / 31
 Most of what occurs between invention
and revenue is management.
example, we anonymized and aggregated certain data sets, and
gave our academic partners access to it, subject to appropriate
security and confidentiality arrangements. This enables students
to explore what kind of interesting insights and algorithms can be
developed, leading to dialogues and all sorts of opportunities to
develop solutions for our customers.
Can you talk a bit about how you’re leveraging third-party
datasets as part of your AI strategy?
MZ: If you work for a large organization, never underestimate the
challenge of just getting at the data that you think you’ve already
got. As indicated, it likely sits in different silos, which quickly
raises organizational issues and data-governance issues. Even if
you can get access to it, is it in the right format? The complexity of
real-world data is a major issue. Getting our own data organized
so it becomes ‘AI friendly’ is a critical exercise.
Also, Scotiabank is very active in various Latin American
markets, and we see a tremendous need there to provide better
service to our small business partners and customers. It’s not
easy for a small business to get along with any of the big banks,
because their processes weren’t designed for small businesses.
Of course, there are fintechs out there that have a very dif-
ferent approach. Currently, we’re partnering with one called
Kabbage, which works with small businesses. We realized that,
if they provided us with access to what these merchants were
selling and when they were getting paid, we could determine the
credit-worthiness of individual merchants — and dramatically
accelerate the loan-approval process. We can now say to small
business leaders, ‘Here is the traditional process for getting a
loan; and here is an expedited process that we offer with our part-
ner, Kabbage. If you agree to share some of your data with us, you
can go down the latter path, which is much faster’. This is just one
example of how we’re using data in new ways.
SMEs [small-to-medium-sized enterprises] are an important
component of our economy. Given that they don’t generate
or have access to huge amounts of data, how can they em-
brace AI?
TM: On the one hand, for companies that have large amounts of
data, there are huge economies of scale and network benefits to
32 / Rotman Management Winter 2018
be had. Just look at Google or Alibaba: These are unbelievably
data-intensive companies that are thriving thanks to AI. On the
other hand, different types of digital technology are benefiting
SMEs. For example, Cloud computing. At one time, if you had a
small business, you had to purchase your own servers, but today,
you don’t have to do that — and as a result, these companies can
scale themselves much faster than in the past. Also, in a digital
world, you often don’t need to build a factory, and you can access
global markets directly by selling online.
It’s still early days for AI, but as it becomes more mainstream
and gets packaged and sold to businesses, there will be ways for
SMEs to leverage it. For example, one of the biggest prediction
problems for a small business is, predicting your cash flow, and
there is already a company out there building an AI engine to do
that flow for small businesses. That is a well-defined prediction
problem: A small business doesn’t have massive amounts of data
— but it does have all of its financial information for the life of
the business. So, there will be applications for SMEs. Obviously
there’s an entry cost, and you need to look at whether you can
partner with new ventures to accelerate your progress; you don’t
have to build it all yourself.
We would be remiss if we didn’t touch on human capital. Tiff,
what are your thoughts on how AI is going to affect jobs and
competencies?
TM: If you believe, as we do, that AI is dramatically dropping the
cost of prediction, this means that jobs involving a lot of predic-
tion are going to see declining demand and lower wages. On the
other hand, jobs that are complementary to prediction will do well.
In the realm of healthcare, if you work as a radiologist, spending
most of your time looking at x-rays, very soon, AI is going to be
able to read x-rays faster and more reliably. But, if your job is to
care for those people, or figure out what treatment they need next
— those skills are only going to rise in demand.
I don’t want to minimize the disruptive effects that AI
will have on society. If we see really rapid progress, it will
have serious implications. We are already seeing this play out
in the world: Which two countries have the highest levels of
inequality in wealth distribution? The U.S. and the UK; and the
consequences of that are the election of President Trump and
Brexit. The consequences have nothing to do with the prob-
lem, really; but they are features of the anxiety lots of people
are feeling. And, we shouldn’t kid ourselves in Canada: We do
have a more redistributed tax system, but we’re seeing the same
trends and the same anxiety. As a society, we need to manage
this a lot better.
Michael, how is AI impacting human capital at Scotiabank?
MZ: Earlier, Tiff touched on the first-generation uses for AI
in financial services, and collections and fraud are two great ex-
amples. It’s actually a significant challenge to systematically
optimize collections, because you need to determine several
things: Out of all the customers who don’t pay up initially, who
will eventually pay? And for those that will not pay you other-
wise, should you contact them when they’re one day late or
10 days late? How should you ask for a promise to pay, and
how insistent should you be? This actually requires a fairly
complex resource-organization model, and we’ve already seen
great results from using machine learning to optimize our col-
lection process.
Fraud is more about ‘anomaly detection’, and we end up
chasing a lot of false positives. That not only wastes untold re-
sources, but can negatively impact our customers. Say you buy
an expensive ring for your partner, and one of our alerts goes
off. Suddenly, your credit card is declined, because this unusual
purchase raised a red flag. These situations will be handled far
better through AI.
Statistical tools have been around for hundreds of years. The
way most tools traditionally work is, you say, ‘I have a view that A
depends on B. So, let me run some regression analysis and vali-
date that view’ and you complete it. Through this, good or bad
outcomes are determined and you modify the model. Machine
learning inverts that process, so the user says, ‘I am not postulat-
ing anything up front: The data will tell me’.
That is a fundamentally different way of thinking, and it
turns deployment into much more of a ‘test-and-learn’ approach,
because the data will tell you different things, and you then need
to test it on a larger scale. To foster this mindset shift, we have
trained ‘digital coaches’ in place to help our teams adjust to the
test-and-learn approach.
How do you find a balance between innovation and risk
management?
MZ: I strongly believe that at the end of the day, automation will
always reduce risk, because the majority of risk we see in prac-
tice relates to human error — and ultimately, automation reduces
human error. The idea of testing and learning is extremely impor-
tant. By trying out different things early, you will catch mistakes
earlier. Traditionally, organizations — particularly large ones —
have a mentality where they try to define everything up front,
build it, and roll it out. We just expect that our customers will
like it, and that everything will work properly; but usually, there
are challenges. It’s much better to get customers in within weeks
of starting something to obtain early feedback, and run the first
algorithm within weeks of developing the model. The big take-
away for me is that the potential of AI outweighs the risk.
Tiff Macklem is Dean of the Rotman School of
Management. He also chairs the board of the
Global Risk Institute and Ontario’s Panel on
Economic Growth and Prosperity. A member
of the Asian Business Leaders Advisory Board,
he was formerly the Senior Deputy Governor of the Bank of Canada. Michael
Zerbs (Rotman MBA ‘89) is Chief Technology Officer at Scotiabank. Prior
to his current role, he was the bank’s Executive Vice President and Co-Head
of Information Technology, helping to launch its Digital Factory. This article
summarizes a discussion that took place at the Chartered Professional
Accountants of Ontario’s Leadership Conference in May 2017. Interview
moderator Richard Piticco, CPA, CA, is Vice President, Student Services at
CPA Ontario
rotmanmagazine.ca / 33
 The theories of disruptive innovation and Jobs to be
Done are natural complements: The former helps us spot threats
and opportunities, while the latter guides our actions.
by Stephen Wunker and David Farber

ANYTIME A START-UP RAISES A LOT OF CAPITAL or an interesting prod-
uct takes off, the Internet is abuzz with how that company or
product is disrupting its industry. But as Clayton Christensen
— the Harvard Business School professor who coined the term
‘disruptive innovation’ — has explained, the term ‘disruption’
is often misunderstood and misused. It’s about more than just
someone shaking up an industry. While it might seem trivial to
argue the theory’s precise definition, being able to spot the true
markers of disruption enables companies to proactively capital-
ize on potentially game-changing areas of opportunity.
With that in mind, it’s important to recognize that being
able to spot opportunity is only part of the battle. To take advan-
tage of these openings, companies need to design solutions that
satisfy real consumer needs. And that’s where another theory
popularized by Prof. Christensen comes into play: Jobs to be
Done — a theory used to explain why customers buy one prod-
uct over another.
Used together, these two theories are a powerful force:
While the former helps us see where there are promising oppor-
tunities to innovate, the latter tells us how to do so. Once they
understand the details of both theories and how they intersect,
leaders are left with a recipe for successful innovation.
Understanding Disruptive Innovation
The general idea of ‘disruption’ isn’t particularly complicated: A
company successfully challenges an incumbent business by tar-
geting overlooked customers or usage occasions, offering lower
prices, greater convenience or totally new types of performance.
More precisely, three related factors are needed for an innova-
tion to be disruptive.
INCUMBENTS ARE FOCUSED ON UPPER-END CUSTOMERS. An opportuni-
ty for disruption arises when businesses focus on their most de-
manding — and profitable — customers. These companies don’t

rotmanmagazine.ca / 35
 Where to Look for Opportunities
Disruptive Jobs to
Innovation be Done
Where market What the market is
vulnerabilities looking for in
create an the products that fill
opportunity that opportunity
FIGURE ONE
usually run into trouble because they’re blindsided by new tech-
nologies that they never thought of; rather, they tend to ignore
disruptive innovations because those new solutions are initially
insufficient to satisfy the customers they prioritize. Moreover, the
short-term revenues and margins on those new offerings pale in
comparison to those of the solutions being sold to the upper-end
customers. Yet taking those painful near-term steps down mar-
ket — rather than pursuing the seemingly logical steps to satisfy
upmarket customers — is precisely what is necessary to stave off
trouble in the long run. This is what Prof. Christensen refers to
as ‘the innovator’s dilemma’, and it’s what gives smart, forward-
looking leaders an edge.
LESS-DEMANDING CONSUMERS OR NON-CONSUMERS OFFER OPPORTUNI-
TY. When incumbents focus on their most demanding customers,
eventually they end up over-shooting what a lot of their custom-
ers demand. Customers are forced to either pay for more than
what they need, use a product that is too complex for their needs
or not make a purchase at all.
NEW OFFERINGS ARE INFERIOR ALONG TRADITIONAL DIMENSIONS, BUT
COMPETE ASYMMETRICALLY. The disruptive solutions that custom-
ers end up buying offer greater accessibility or lower prices by
trading off some traditional dimensions of performance. Digital
cameras, for instance, initially had inferior photo quality to film,
but they provided photos with no wait or additional cost. While
solutions that excel along traditional dimensions don’t usually
get ignored, products that compete asymmetrically are often
overlooked, and they make it difficult for incumbents to respond.
To show how not all breakthrough innovations are disrup-
tive, let’s look at Tesla. The electric car company has certainly
shaken up the automotive industry. While the Model S excels
along certain dimensions that have been somewhat overlooked
in the industry, it doesn’t fit the criteria of a disruptive innova-
36 / Rotman Management Winter 2018
Warning Signs of Disruption
• Industry offerings have been steadily improving for a long time
• Customers think older versions of a product are good enough
• Using or consuming an existing offering requires substantial
skill or effort
• There are pockets of customers who don’t consume in
the industry at all
• There are many ways to simplify products and remove costs
FIGURE TWO
tion. Rather than introducing an inferior product down market,
Tesla aimed for highly profitable, highly-demanding customers.
In terms of technology, speed, acceleration, and safety — key
existing dimensions of performance — the Model S overshoots
much of what the market demands. Instead of disrupting the in-
dustry, Tesla is prompting competitors to respond.
General Motors’ entry into ride-sharing, through investing in
the company Lyft, is a disruption, even if GM is courageously
disrupting itself. The markets being disrupted are those for urban
transport and second cars. Ordering a ride from Lyft comes with
certain trade-offs: You can’t just jump in the car, you get little sat-
isfaction from the driving experience, and you don’t express your
personal style through your transportation. But on the positive
side, you don’t have to worry about parking, and you avoid the
fixed expense of owning a vehicle.
Understanding the theory of disruptive innovation lets us
see where there is room for innovation. It predicts where there
may be threats from new entrants and how incumbents will re-
spond, but it doesn’t explain what customers want in a new solu-
tion. For that, we turn to Jobs to be Done.
Applying a Jobs-to-be-Done Lens
The basic premise of the Jobs-to-be-Done theory is that cus-
tomers ‘hire’ a product to satisfy a ‘job’ that they are trying to
get done. Jobs can be either functional in nature (e.g., making
sure your children eat a nutritious meal) or emotional (e.g., hav-
ing your partner appreciate the effort you put into making the
meal). At any given time, an individual may have dozens of jobs
that need to be satisfied, and they can occur in hierarchies; you
may care first about the nutritional content of the kids’ meal, but
you’d also like it to taste good.
Successfully launching a new product requires understand-
ing where there are jobs that customers find both important
 The Jobs Atlas

1 2 3

KNOW WHERE YOU’RE STARTING CHART THE DESTINATION AND MAKE THE TRIP WORTHWHILE
FROM ROADBLOCKS

Discover the jobs stakeholders are looking to
accomplish, which are prioritized based
on their job drivers
Determine the current approaches
stakeholders have adopted, and see where
they are experiencing pain points
Identify the succes criteria stakeholders
will use to determine their interest in
a new solution
Investigate the obstacles stakeholders
will need to overcome to buy or use a
new solution
Assess the value of the solutions that
your organization might offer
Beat the competition by defining
the playing field broadly and using
your advantages

FIGURE THREE

and hard to satisfy with the existing array of available products.
There are a number of factors that can be used to predict demand
for a new solution. We use a tool called the Jobs Atlas to show the
overall landscape of Jobs to be Done. It groups those factors into
three primary categories.
1. KNOW WHERE YOU’RE STARTING FROM
The first step in predicting future customer behaviour is under-
standing what is happening today. Successful innovators look at
the jobs customers are trying to get done, as well as the job driv-
ers that make certain jobs more or less important for particular
customer types. Think about Planet Fitness — a gym franchise
that boasted a compound annual growth rate of 26 per cent from
2008 to 2012 and ranked as one of Forbes’ top franchises in 2014.
By many standards, the gym appears to be far inferior to the com-
petition: The facilities have fewer free weights and no pools. It
regularly puts out pizza, bagels and candy. It hardly seems like a
place for fitness buffs. And that’s precisely the point. The people
who choose Planet Fitness prioritize ‘jobs’ such as easily staying
in shape, feeling like they’re doing something for their health and
avoiding judgment as they work out.
It’s also important to understand how people try to get cer-
tain jobs done today and where they experience ‘pain points’.
Finding ways to eliminate the frustrations and awkward work-
arounds that customers experience can be a powerful way to in-
novate. At the same time, telling people that they need to upend
their lives to use your new product is a fast way to make sure that
your launch goes nowhere.
2. CHART THE DESTINATION AND ROADBLOCKS
The second stage of understanding customer decision-making
involves defining what success looks like from the customer’s
perspective and looking at what obstacles will stand in the way
of consumers buying or using a new product. For Planet Fitness,
success might have a few metrics like ‘compliments received
from friends’ or ‘feelings of accomplishment’ — things that gyms
can foster through social gatherings where people talk about how
they’ve gotten more into fitness, for example. Obstacles could
include the lack of occasions that might trigger a visit to the gym
on any particular day — which might be avoided through having
frequent ‘special occasions’ motivating a visit.
3. MAKE THE TRIP WORTHWHILE
Finally, as much as we want to focus on the customer, it’s impor-
tant to look at what else the customer is seeing and how much
they’re willing to pay to get a job done. As good as your new so-
lution may be, it doesn’t exist in a vacuum. There are a number
of competitors out there, and they may not be who you think.
Sree Sreenivasan, the former Chief Digital Officer at New
York’s Metropolitan Museum of Art, once described the mu-
seum’s competition quite insightfully. “Is it MoMA? The Gug-
genheim? No, our competition is Netflix. Candy Crush. It’s life
in 2017.” Understanding the real competition means looking at
any products that could conceivably satisfy the jobs customers
are trying to get done — and then understanding what the value
of accomplishing those jobs is really worth.
Tying the Theories Together
Companies seeking opportunity — or looking to avoid threats —
from disruption can combine these theories in powerful ways.
Jointly, they show where incumbents are vulnerable and how
customers hunger for new solutions.
Finding where low-end disruption might occur requires
disaggregating offerings into the jobs they get done for people.
Which of these jobs are over-served, and in what circumstances?
Seen this way, it’s obvious that ride-sharing services can disrupt
automakers. Second cars, for instance, may not be commonly
used for big family outings and large shopping trips. Rather,

rotmanmagazine.ca / 37
a significant number of families may use them when circum-
stances spring up or for short commutes — ideal situations for
disrupting car ownership.
These low-end opportunities often stem from a handful of com-
mon job types:
• Access a solution quickly, without worrying too much about
whether it’s perfect;
• Avoid having to acquire any special skills to use the solution;
• Make do in a temporary situation, such as being away from
your usual home or office;
• Save money however possible.
By contrast, new market opportunities stem from understand-
ing the full landscape of jobs that people are trying to get done
Six Questions for Stephen Wunker
The jobs people want to get done can be both functional
and emotional in nature. Which should innovators focus
on first?
The first step is to design a product that satisfies
one or more functional jobs in a superior way.
But if you can also appeal to your customers’
emotional needs, you can create a breakthrough
success. When Apple paid $3.2 billion to buy
Beats Electronics in 2014, critics complained
about the inferior quality of Beats’ headphones. But, despite
competing against technically-superior products from Bose,
Sennheiser and JBL, Beats earned a 40 per cent market share
after just four years. Why? Because the company addresses
emotional jobs.
From the beginning, Beats focused on getting its product
into as many music videos, locker rooms and runway shoots as
possible, so that they were associated with celebrity, glamour
and status. The $300 price tag basically buys you a seat at the
cool kids’ table in the cafeteria of life. As competitors figure out
how to satisfy the same functional jobs at a lower price point,
emotional elements can really differentiate a product.
Tell us more about the role of ‘job drivers’.
Job drivers are the underlying contextual elements that make cer-
tain jobs more or less important for a specific customer, and there
are three types: attitudinal, background and circumstantial.
In terms of attitude, what social pressures do your custom-
ers face? And what personality traits affect their behaviour? In
terms of background, what does their context look like, in terms
of geography, socio-economic status and culture? And in terms
of circumstances, what immediate factors in the environment are
likely to affect their decision-making? That could range from their
work schedule to the weather.
Say your friend ‘Stan’ is shopping for a new car. Like most car
buyers, his key jobs to be done include avoiding breakdowns, having
a comfortable ride, and ensuring his safety. However, his combina-
tion of attitudes, background and circumstances will differentiate
him from other car buyers who share those same jobs to be done.
38 / Rotman Management Winter 2018
in certain situations, no matter how they might be accomplish-
ing those jobs today. For instance, digital cameras, and then cell-
phone cameras, sprung up not because people were too cheap
to buy film (these solutions started out being expensive) but
because people wanted to have a good image even if that meant
taking a lot of pictures, and they wanted to share those images
immediately and widely.
There are innumerable types of jobs that can give rise to new
markets, but very rarely are the jobs themselves new. You need to
look at what people are trying to get done, and then think about
how novel solutions could accomplish those jobs in distinct ways.
Understand what jobs really matter to people, and where current
approaches are cumbersome or frustrating, even if people take
those limitations for granted. People used albums and double
In terms of attitude, Stan has an MBA from an Ivy League
school, and many of his peers are highly successful — which
drives Stan to want to show off his own level of success. In terms
of background, Stan lives in New England, which means he needs
a car that can climb up a hill in the snow. And in terms of circum-
stances, he happens to be shopping for this car during hockey
season. He volunteers for his son’s team, which means he often
drives players with lots of equipment around. As Stan’s story
indicates, even customers who have similar jobs to be done will
make different decisions about what products they use to satisfy
those jobs.
Ultimately, it is a combination of jobs and job drivers that dif-
ferentiates customers.
What is an example of a company that embraces the Jobs-
to-be-Done approach?
Nike recognizes that its customers have ‘jobs’ for their footwear
beyond just comfort and support. Lots of people are looking to
accomplish emotional jobs when they buy a pair of shoes, like
‘expressing my individuality’. The competition to do that job
could be a radical new haircut or a new bumper sticker. Or, if the
job is ‘projecting status’, the competition could be a fancy watch.
Nike recognizes that every time a customer satisfies one of these
emotional jobs by visiting the hair salon or buying an expensive
watch, that customer has less incentive (and cash) to buy a new
pair of sneakers. That’s why it has moved beyond traditional
tactics — like associating athletes with its products — to find
new ways to satisfy emotional needs. NIKEiD, for example, allows
customers to design custom shoes by choosing the design,
materials and colour of their shoes. Its tagline says it all: Express
your identity.
You have said that Uber’s success is based on Jobs
principles. How so?
Just think about what it was like to hail a taxi before Uber. You
might have had to wait out in the rain, hoping a cab would stop for
you; then once you got a ride, you would have to nervously check
your wallet as you watched the meter continue to tick up. When
prints to share pictures before the advent of digital photography,
but digital’s better way of doing so created entirely new indus-
tries by addressing problems many people didn’t even realize
they had.
In closing
The theories of disruptive innovation and jobs to be done are
natural complements. The former helps us spot threats and op-
portunities, while the latter guides us on what to do about them.
But success can only come once the fundamental elements of
those two theories are extracted and thoroughly understood. By
breaking industry movements and customer behaviours down
into identifiable parts, companies can develop concrete views on
how to plan for the future.
you look at how many ‘pain points’ there were around satisfying
such a basic job — confidently being able to get from point A to
B — it’s no wonder that consumers were so willing to embrace
Uber’s solution.
Uber really thought carefully about the full set of things that
people are trying to get done in the realm of mobility. The fact
is, it’s not just about getting from one place to another; it’s also
about knowing how long that will take, how long you will have
to wait, how much it will cost and whether the driver will have
change. Uber has addressed all of these pain points.
What is the role of Big Data in the Jobs-to-be-Done
framework?
Data can tell you a lot — like what your customers are buying,
when they are buying it, and whether they are satisfied with their
purchase. What it fails to provide is context. It can’t tell you that
a particular shopper chose your brand of toilet paper to placate
his screaming toddler, who ‘needed’ the one with the puppy on it.
Big Data fails to provide crucial information about why customers
make decisions — and how they interact with products after they
are purchased. It is notoriously bad at telling us how customers
emotionally relate to products, or how they use them in ways that
you never envisioned.
That’s why the most successful consumer-goods compa-
nies — like Procter & Gamble, Microsoft and General Mo-
tors — have ethnographic researchers on staff. But the benefits
of primary research hold just as much value in fields such as
financial services and healthcare. At the end of the day, offering a
new solution requires deep insights into how and why decisions
are made; what level of frustration will push a customer to seek
out new offerings; and what criteria new products need to satisfy.
Should people focus mostly on existing customers
or non-customers to obtain the best insights?
There are actually three groups that you should reach out to, all
of which provide a different type of insight. First, your existing
customers, who can tell you what your products are particularly
good or bad at. They can also tell you whether your product is
Stephen Wunker is Managing Director and
U.S. Office Head of New Markets Advisors. He
is the co-author of Jobs to be Done: A Roadmap
for Customer-Centered Innovation (AMACOM,
2016). He co-founded Yowzit, one of Africa’s
leading sites for ratings and reviews and was Managing Director of Celpay, a
mobile commerce start-up that was sold to South African financial services
group First Rand. David Farber is a consultant at New Markets Advisors and
the co-author of Jobs to be Done. The book’s third co-author is Jessica Wattman.
being used to solve a slightly different problem than what you
intended. For instance, Kleenex was launched as a disposable
towel for removing makeup; its creators never dreamed people
would use it to blow their noses!
The second group to engage with is customers who are
currently buying competing products. Here, the goal is to learn
what makes these customers different from yours — beyond
the superficial answers that they are likely to start with. Just
look at Walmart, Target and Kmart — three discount retailers
that cater to very different customer types. Despite a number
of similarities in selection and pricing, Target customers rarely
consider shopping at Walmart or Kmart, because Target satisfies
emotional jobs that the other two do not. Target shoppers love a
deal as much as the others, but they are much more image con-
scious. Their lifestyle choices and social groups motivate them to
place a higher emphasis on looking fashionable and buying in a
socially-responsible way.
The final group to investigate is individuals who are not
consuming the category of products you sell at all. Do they have
a different set of jobs that they are looking to get done? Perhaps
something is holding them back? These individuals, in particu-
lar, offer valuable opportunities for expansion. Leading brewer
Anheuser-Busch sought to attract new customers — those
who preferred cocktails to beer — by creating Bud Light Lime-A-
Rita. Leveraging Bud Light in this way made margaritas more ap-
proachable and more ‘co-ed’, giving them a chance to promote a
Bud Light product at venues with traditionally low beer sales.
It’s important to challenge established views of what your in-
dustry sells and how it operates. The Jobs-based lens creates a
broader view of competition, illuminating new avenues for growth
and sharpening your view of where disruptors might appear.
This approach also ensures that your brand remains fresh as
the world continues to evolve.
rotmanmagazine.ca / 39
CREATING
GREAT
CHOICES:
Integrative Thinking
for Leaders
There are consistent patterns to the way successful
strategic thinkers generate solutions.
by Jennifer Riel and Roger Martin
IN THE LEGO MOVIE, there is a joke that always makes Jørgen Vig
Knudstorp laugh. The hero of the movie, a mini-figure named
Emmett, is admiring Batman’s awesome plane. “Could you make
one of these in orange?” Emmett asks. “I only work in black,”
Batman growls back. “And sometimes, very, very dark grey.”
Given Batman’s well-known penchant for all things dark,
it’s a funny line to comic book fans. But for Knudstorp, the lanky,
bearded, bespectacled CEO of the LEGO Group, it’s funny for
a whole other reason. “When I became CEO, I was this young,
former McKinsey consultant — you know, Mr. Business,” Knud-
storp says. He was the first outsider, and the first person outside
the family, to run the Danish toy company in its 80-year history.
His daunting job was to turn around a beloved organization that
was losing money.
He began by cutting jobs and rationalizing the company’s
product line. “We had 13,000 different colours and shape varia-
tions,” he recalls. “With that level of variation, we never had
inventory.” One of the colours slated to be cut was Old Gray. It
was a very, very dark gray that seemed redundant, given that the
company would continue to sell black bricks and the lighter Stan-
dard Gray.
The brand’s fans — found online on the LUGNET, an early
LEGO product users group network — were furious. It turns out
these adult master builders used Old Gray as a shadow element
when building castles, statues and skyscrapers. Knudstorp spent
a good deal of time online defending his decision, coming to un-
derstand LEGO’s most passionate fans in the process. “I was con-
necting with our fans for the first time. I was having a dialogue,
which I probably did not win,” he says with a laugh.
Knudstorp sees Batman’s quip, at least in part, as a nod to
his own early fight over very, very dark gray. To him, it shows
how much the filmmakers came to understand the essence of
rotmanmagazine.ca / 41
 Most of us choose one of the options in front of us, instead of creating
a new answer that solves the problem in a more successful way.
the LEGO brand: The joy of building, as embodied in those mas-
ter builders. It was a journey of great personal importance to
Knudstorp in his role as a key guardian of the LEGO brand.
Now a little background. LEGO Group’s core business is
its little stackable plastic bricks. But it has also had, since 1999,
a highly profitable licensing business. At first, licensing meant
deals that enabled LEGO Group to make constructor kits and
mini-figures based on beloved franchises like the Star Wars films
and the Harry Potter series.
Beyond the bricks, the company soon began extending these
partnerships into original entertainment, partnering to produce
films, TV shows, and video games. By about 2005, some of the
short films, such as LEGO Star Wars: Revenge of the Brick, had be-
come massively successful.
Eventually, the idea of an original LEGO feature film made
its way to the company’s brand and innovation board. Knudstorp
recalls: “I think we all sort of thought, ‘This is a little crazy. Why
would anybody do that?’” Nonetheless, the group gave the go-
ahead to explore the idea and signed an option deal with a Holly-
wood studio. But board members remained wary. The company
had had great success with branded entertainment, partnering
with many of the most powerful entertainment brands in the
world. But its own early foray in feature-length films — 2010’s
direct-to-DVD film LEGO: The Adventures of Clutch Powers, had
been disappointing. “It was so brand true,” Knudstorp explains.
“It was so loyal to LEGO. The good guy was called Kjeld [after
LEGO group chairman Kjeld Kirk Kristiansen]. But, really, it was
boring; it had no edge.”
A Tale of Two Choices
From this experience, Knudstorp learned that LEGO Group
might not be in the best position to tell its own story. He likens
the situation to the task of a screenwriter adapting a book: what
works on the page doesn’t always work on the screen. “If you
want somebody to write a great movie script, and then direct a
great movie based on the book, one of the first things they will do
is violate the book,” he says. “Maybe there’s an uncle that plays
a main role in a novel that’s 300 pages long. But when you make
the movie, it’s one and a half hours, and there’s no room for the
42 / Rotman Management Winter 2018
uncle; so he disappears.” The essence of the book remains, but it
is recrafted for its new context. “Normally you would never have
the book’s author script a movie or a video game,” he says. The
author is too close to the book — too tied to her own words and
vision to effectively adapt the book to a new context.
The same held true for the LEGO brand. “It does not work
that LEGO Group says what the movie should be all about, be-
cause we become too dogmatic,” Knudstorp says. “We become
too clinical about it. Because we’re not good at writing movies.
That’s not our business.”
The problem, then, was how to make a great film based on
the LEGO brand. There were many possible models for pro-
ceeding in partnership, but for the moment let’s consider two
extremes. On the one hand, LEGO Group could maintain total
creative control, hiring screenwriters and directors to execute
based on a corporate vision for the film. Although this approach
would ensure the LEGO brand was protected, it would also mean
that no top-tier talent would come near the project. With no free-
dom to play, the film would be an unappealing gig for the best
screenwriters and directors, who struggle with the idea of being
beholden to producers and studios, let alone to a big corporation.
Moreover, this was essentially the strategy that had produced the
lackluster Clutch Powers film.
On the other hand, LEGO Group could cede all control to
the filmmakers, letting the Hollywood team have full creative
rights over the characters and story, including how the brand was
depicted. This approach could attract great talent and produce a
successful film; but it would also put the brand at risk, giving out-
siders the opportunity to do lasting damage to the equity of the
LEGO brand.
Neither choice filled Knudstorp and his board with confi-
dence. As they weighed the possibilities, they came to recognize
that they needed a new choice. What they really wanted was a
movie that was a creative triumph and would elevate the LEGO
brand.
The key to a great movie is great talent, so ceding creative
control was essential. How, then, might Knudstorp and his se-
nior team ensure that the creative ‘outsiders’ would treat the
brand with the right amount of love and just enough irreverence?
 Optimizing and Integrating

Optimizing:
Trading off to find the point
between choices A and B
that I can live with
Integrating:
Taking the best of choices
A and B and creatively
reconfiguring them to
create new value

A What I can live with

A What I
truly need

B B

FIGURE ONE

It would be a tricky balance, to be sure. Knudstorp needed to turn
the outsiders into insiders, but in a way that did not compromise
the quality of the work.
He explains how this was done: “We actually gave the pro-
ducer and the screenwriters at Warner Bros. complete freedom
in coming up with a script. We had every opportunity to read it
and comment, but we had no rights over it.” LEGO Group lead-
ers had to trust that it was in the team’s best interest to make a
film that captured the essence of the LEGO brand. After all, if
it failed to do so, the movie would ultimately fail with fans. So
Knudstorp decided to make it easy for the filmmaker to do right
by the brand — to embrace it the way a fan does.
To achieve that, he insisted that Phil Lord and Christopher
Miller, the creative team, spend time with LEGO’s super fans—
kids, yes, but also the adults who had given Knudstorp so much
trouble over Old Gray. Knudstorp remembers:
I said to them, “You need to see these guys. You need to talk to
them. You need to attend the conventions with me. You need to read
the letters” — we get thousands of letters from children of all ages —
“and you need to come to our consumer contact centres and sit next
to the LEGO employees. You need to go to the LEGO stores, talk to the
staff and understand how real LEGO product fans talk.” [The film-
makers] willingly did that, and of course, spent a lot of time with our
designers. I think they were genuinely surprised about how powerful
the brand is.
By connecting Lord and Miller with real LEGO customers,
Knudstorp helped them not only understand the brand, but fall in
love with it themselves. Even better, the stories from customers
helped to inform the plot of the film. The filmmakers learned, for
instance, that “one of the things that is very important in the fan
community is that you must never use glue,” Knudstorp explains.
“That’s an absolute no-no for a true LEGO fan, because the es-
sence of LEGO is the ability to build and rebuild, to imagine and
make new.” Lord and Miller picked up on the theme and (spoiler
alert) made glue a central part of the film.
The result: The LEGO Movie was a smash success. It made
more than $450 million at the global box office and boosted
LEGO Group sales by double digits on the strength of movie-
themed merchandise, including mini-figures of Emmett and Bat-
man. By the end of 2014, LEGO Group was the most profitable
toy company in the world.
A New Answer Through Integrative Thinking
The path to success for The LEGO Movie included a different kind
of problem-solving process, one focused on opposing ideas and
opportunities rather than on right answers and hard choices.

rotmanmagazine.ca / 43
 Effective decision making means generating
and prototyping many varied ideas.
As Knudstorp told CNN in 2014: “When you’re a CEO, you’re
sort of forced all the time to have a clear hypothesis — you know,
one answer. [But] instead of reducing everything to one hypoth-
esis, you may actually get wiser if you can contain multiple hy-
potheses. That’s when you notice trade-offs and opportunities.”
You give yourself a chance, as Knudstorp observes, to use dueling
hypotheses to create a superior answer.
This is the heart of Integrative Thinking, an idea Roger
Martin first explored in his 2007 book The Opposable Mind: How
Successful Leaders Win Through Integrative Thinking. In it, he de-
scribes integrative thinking as a way of thinking that enables the
creation of new answers to our toughest problems — a process
that uses the tension of opposing ideas to help create transforma-
tive new answers.
In Knudstorp’s case, he used the tension of opposing choices
to create an answer that far more effectively solved his problem
than either of his initial alternatives did. The choices in tension
were that, on the one hand, he could insist on creative control
to protect the LEGO brand, but meaningfully diminish the like-
lihood that serious artists would be willing to take part; on the
other hand, he could cede all control of the film to ensure that it
would have the great talent needed to make it creatively success-
ful — but in the process, put his firm’s reputation at risk.
Many leaders would see this as an optimization problem:
How much control do I have to give up to attract just enough tal-
ent to make the film a good one? Knudstorp rejected that way of
thinking. He wanted an outstanding film, and he wanted one that
not only supported, but grew the LEGO brand. He framed his
challenge as one of integration rather than optimization. In other
words, he saw it as his job to create a new, superior answer rather
than to choose between sub-optimal options.
Making vs. Creating Choices
How often do you make choices? Really make them? Or how of-
ten do you instead accept one of the choices that is handed to
you? Most of us settle, most of the time. When faced with a tough
44 / Rotman Management Winter 2018
decision, we choose one of the options in front of us, instead
of creating a new answer that solves the problem in a more
successful way. Typically, we look at our options, assess their
pros and cons, and choose the one that comes out ahead in the
analysis.
It is natural to accept trade-offs. It fits with our understand-
ing of the world and with the decision-making tools that derive
from that understanding. We are taught early that life is hard. In
the immortal words of the Rolling Stones, you can’t always get
what you want. So we learn to pick and choose. We analyze the
options rather than generating new possibilities. We develop
decision-making tools that are evaluative rather than creative.
Sometimes, if we’re lucky, there is an obvious right an-
swer — a solution that solves the problem and that everyone
can agree on. But often, there is no obvious right answer and
no single solution that will please everyone. Perhaps the op-
tions on the table solve only one part of the problem, address-
ing symptoms rather than causes; or maybe the folks around the
table disagree over which is the best answer, producing warring
factions who support vastly different solutions. Or possibly,
there are multiple good answers, but choosing only one of them
means giving up all that is worthwhile about the others. In these
cases, we often find ourselves making unhappy compromises,
arguing with our peers, struggling to decide — and delaying
meaningful action.
At LEGO Group, the choice between having a great film or
a film that bolstered the LEGO brand was unacceptable. Knud-
storp couldn’t choose only one of these outcomes; he needed
both in order to move ahead. To wind up with a movie that
was great creatively and great for LEGO Group, he needed to
design an answer that would give him the best of both worlds.
So he did.
He asked, ‘How might I design a model of engagement
with the filmmakers that gives them the creative control they
need, but does so in a way that fills me with confidence they
will protect the brand?’ Rather than compromise, proposing
complex legal agreements and oversight meetings, he lever-
aged the master builders — the fans — whose infectious love of
all things LEGO-related would inevitably transfer over to the
filmmakers, making them fans as well.
Mindset is key to this approach. Knudstorp and other in-
tegrative thinkers have a ‘way of being’ in the world — a way of
thinking through their most difficult choices — that stands in
marked contrast to the way most of us think and make decisions.
In most cases, our thinking is implicit and rarely explicitly ques-
tioned. Our models of the world can be influenced by forces of
which we are unaware — and once we see the world in one way,
it can be hard to see it in any other way. As a result, we tend to
seek out the single right answer to any given problem, default
to simplistic models of the world and rely on basic heuristics to
get through the day. These limitations tend to create an insular
mindset that discounts other people and their alternative points
of view. And they tend to produce bad decisions.
There are three missing components that might overcome
the limitations of current decision-making processes and pro-
duce better outcomes:
METACOGNITION, or the ability to reflect on and understand our
own thinking. To be more effective choice makers, we must be
clear with ourselves and with others about our own thinking and
what lies beneath the choices we make.
EMPATHY — the ability to understand and appreciate the views of
others. Other people see what we do not, and so they’re crucial to
our ability to advance our understanding of the world. To over-
come the limits of our existing approaches to decision making,
we need to learn to inquire deeply, genuinely and respectfully
into what other people think and why they think it.
CREATIVITY: Effective decision making demands that we unleash
creativity in small, repeatable ways. To us, this means generat-
ing and prototyping many varied ideas. This approach to creativ-
ity takes it from the realm of the mystical — something only for
genius artists and entrepreneurs — to the domain of a skill that
can be learned through practice.
With these three components as the base ingredients for an
effective approach to decision making, you can lay the ground-
work for a new way to think and work your way through difficult
problems of almost any type.
In closing
The approach summarized herein is based on consistent patterns
that we have seen in the ways that successful integrative think-
ers go about generating their solutions. LEGO Group, of course,
had a specific challenge and a particular context. Knudstorp
was CEO, and a brilliant one at that. His situation, problem, and
solution likely bear little resemblance to the day-to-day chal-
lenges that you face at work. But the way he thought through the
problem—his mindset and methodology — apply far beyond the
LEGO Group’s headquarters in Denmark.
Jennifer Riel is an Adjunct Professor at the
Rotman School of Management and Managing
Director of its Martin Prosperity Institute’s
Knowledge Infrastructure project, which
includes oversight of Rotman I-Think — an
elementary and secondary school Integrative Thinking and Design Thinking
program. Roger Martin is Director of the Martin Prosperity Institute and the
Michael Lee-Chin Family Institute for Corporate Citizenship at the Rotman
School and the Premier’s Chair in Productivity & Competitiveness. He served
as Dean of the Rotman School from 1998 to 2013. Jennifer and Roger are the
co-authors of Creating Great Choices: A Leader’s Guide to Integrative Thinking
(Harvard Business Review Press, 2017), from which this article is adapted.
rotmanmagazine.ca / 45
 THE NEW LEADERSHIP
IMPERATIVE:
Embracing Digital
Transformation
Digital transformation is possible for every organization.
And it’s becoming more necessary by the day.
by Maxwell Wessel
DIGITAL TRANSFORMATION IS A HUGE BUZZWORD these days — but the
fact is, it’s not a new topic. More than 30 years ago, Harvard Busi-
ness School Professor Michael Porter wrote about how informa-
tion technology (IT) would transform competitive advantage.
Professor Porter saw what was happening with the democratiza-
tion of IT, and predicted that this new ‘IT layer’ of every orga-
nization would transform business, enabling information flow to
scale in ways that were not possible before.
Professor Porter was right: Thanks to technology, today’s
companies can reach around the globe to find customers in new
markets, and IT has become the ‘binding glue’ underpinning all
sorts of traditional-style industrial growth.
However, when we talk about digital transformation today,
there is much more to the story. Today, we have Amazon, the
biggest retailer by market capitalization, with only a handful of
experimental stores; Uber, the biggest livery service in the world
by fleet and by countries reached, with no vehicle ownership; and
Airbnb, the biggest hospitality service by number of locations,
with no owned properties. Clearly, the way companies are em-
bracing digital to create business models and attack the market-
place is very different from the way we talked about digital trans-
formation over the last 30 years.
In this article I will discuss three key aspects of digital trans-
formation: What used to matter; what matters today; and the key
challenges organizations face.
What Used to Matter?
To describe what used to matter, I will use a simple example:
Soap — the prototypical product of the industrial process. At
the turn of the 20th century, Procter & Gamble was building
a massive business — and it was not based on technological
innovation. Sure, Ivory was ‘the soap that floats’; but the most
interesting thing P&G did was to master a set of functions that
were largely unavailable to the average company at the time: It
mastered the sourcing of supply to scale; distribution across the
nation and ultimately the globe; and, most importantly, the pro-
cess by which a company can market to and create a customer
base from a distance.
When P&G first tackled the art of print advertising, there
was no precedent for a company to reach around the world to
rotmanmagazine.ca / 47
 Today you can rent scale from anyone, but you can’t
rent terabites of data from your competitor’s server.
create a critical mass of customers. Prior to that, people had
to visit their local general store and have a piece of soap carved
from a massive bar for individual use. P&G succeeded due to its
mastery of process at scale — something that had never before
been achieved.
When the DuPont company came along, it too was able to
manage a conglomerate of organizations, primarily because it
developed metrics to allow for the remote audit of its processes.
At the turn of the 20th century, the best companies in the world
competed with the knowledge of what would allow them to per-
form — even when their managers weren’t around. IT-driven
metrics allowed for that, and it was transformational.
In short, the 20th century was all about industrial scale. That
is what mattered, and great global businesses were built on the
back of a mastery of those processes.
How times have changed. Just look at a company like Bor-
ders — an example of a business that had a perfect mastery of
industrial scale, Borders had retail locations across the country;
a keen understanding of how to price and manage its inventory;
and relationships with distributors and logistics companies that
allowed it to actually move physical materials like no one else in
the industry. But none of that stopped Amazon from up-ending
its business.
Put simply, all of the things that allowed companies to build
massive, valuable industrial-scale businesses in the 20th cen-
tury are now ‘for rent’. Apple is the largest consumer electron-
ics company in the world. Theoretically, as such, it should have
some manufacturing scale to provide the types of returns and
scale advantages that people coveted throughout the 20th cen-
tury. Instead what does Apple do? It rents manufacturing capac-
ity from Foxconn.
The fact is, if we can rent scale from Foxconn, communi-
cation infrastructure from Trillium, computing capacity from
Amazon and logistics capacity from FedEx or UPS — we have ef-
fectively decomposed what it means to be an industrial business.
What Matters Now?
So, what matters today? The answer, I would argue, is data.
IBM has a tagline, ‘Data is the new oil’ — meaning that the sub-
stance by which we powered industrial change will power digital
48 / Rotman Management Winter 2018
transformation. The point is not that data is valuable in and of
itself. The only people who profit from telling you that are those
who sell data storage infrastructure. Data is specifically valu-
able today because it has three very interesting properties that
lend themselves to competition — and enable textbook cases
of disruption:
DATA IS SCALABLE. Data is infinitely scalable, with little to no
marginal cost. Typically, when I ask an audience if Uber is a
Big Data business, everyone raises their hand. It seems so obvi-
ous; however, I would argue that Uber is a small data company,
and here’s why: When I wanted a taxi, I used to have to raise my
hand and wait for a taxi driver to see that hand. In order for that
system to work, you needed thousands of taxi drivers, driving
around the city looking at the sidewalks, processing reams of
visual data in a parallel computing system that is known as the
brain. We basically had thousands of brains computing huge
amounts of data to identify whether someone’s hand was risen.
Today, I can send one signal, and that signal says, ‘I am
looking for a ride, and I am in this location’. That is a far small-
er piece of data, and the fact that it is captured digitally allows
Uber to replicate it at no cost to thousands of drivers around
a city. Because data is scalable at no cost, we are seeing this
throughout the new digital economy: Companies taking ad-
vantage of the fact that they can get a signal and they can scale
that signal very easily. Basically, data’s scalability allows a busi-
ness like Uber to create a new operating model — and also en-
ables it to improve very rapidly.
DATA IS REINFORCEABLE. The second thing about data is that it
gets better over time. Think about the Netflix recommenda-
tion engine. Initially, those recommendations weren’t very
good, but today, I’d argue that Netflix understands the type of
content that I want. It has figured out how to decompose the
recommendations algorithms based on time of day and what
I’m looking for, because over time, it’s been watching how
I behave.
In Netflix’s early days, every time I rated a movie that I had
viewed, it observed my behaviour and the algorithm reinforced
itself over time. This feedback loop and the value it creates is
fundamental today. While I can replicate my competitor’s in-
dustrial scale, I cannot replicate the data they have collected,
or the time they’ve had to reinforce what they’ve built. Data
being reinforceable allows for cheap products to replace con-
cierge services. I can walk into a Neiman Marcus or a Saks
and get recommendations from a highly paid individual who
has experience in the fashion industry; or, I can go to Stitch
Fix and get the same types of recommendation with no mar-
ginal costs. At first, that recommendation algorithm will not be
nearly as good as what comes out of Saks, but the fact that it
reinforces itself over time — improving very rapidly — allows it
to be disruptive.
DATA IS DEFENSIBLE. Today, you can rent scale from anyone, but
you can’t rent (or steal) terabites of data from your competitor’s
server. In the past, if you hired an engineer from a competing
organization, they would bring with them an understanding of
‘trade secrets’. Part of the reason that we have Silicon Valley
today is that there were no enforceable non-compete clauses,
freeing people to move from one organization to another and
bring best practices for building a Big Data infrastructure into
an upstart like Facebook.
When you’re talking about assembling technological in-
frastructure, that is doable; but when you’re talking about, say,
building an AI system that differentiates between a good rout-
ing of ‘how to drop somebody off at the edge of the city’ and
a bad routing that wastes 15 minutes, a particular individual’s
understanding of infrastructure no longer plays a role. It’s the
data itself that allows Uber to coordinate its transactions so
spectacularly, and you can’t simply hire someone out of Uber
that has memorized the billions of records in a given city sys-
tem. As such, it becomes impossible to poach capabilities from
competitors in the same way.
Information-Based Disruption
The disruption enabled by data is a new form of disruption. We
used to talk about ‘low-end disruption’, whereby the disruptor
is focused initially on serving the least profitable customer, who
is happy with a ‘good enough’ product. We also used to talk
about ‘new-market disruption’, which occurs when a product
fits a new or emerging market segment that is not being served
by existing incumbents in the industry.
Today, we are seeing information-based disruption. When
data is your core asset, change happens more rapidly. That’s be-
cause, once a company like Netflix has the information it requires
to build a good recommendation algorithm, it actually gets better
at doing lots of other things, too.
When Netflix acquired the rights to produce House of Cards,
it was thanks to its recommendation algorithm. By monitoring
and creating profiles for it users, the company understood what
types of content were in high demand (and what was in low de-
mand.) Political thriller content, it turned out, was in high de-
mand, and the platform offered low amounts of such content.
Netflix used the same information — data that was re-enforce-
able, scalable and defensible — that had previously allowed it to
provide concierge-like service to its users to create original con-
tent that was in extraordinarily high demand.
Companies that behave like this — that harness data, build
network effect, leverage the scalable nature of those assets and
reinforce their data over time — can rocket forward in their abil-
ity to disrupt. And, when an incumbent business embraces them,
that business can rocket forward, too.
Even if we accept that all of this is true — that what matters
today is the ability to harness data to create feedback loops that
reinforce your competitive advantage — there are still many com-
plexities involved in making this transformation. Following are
some of the key challenges organizations face.
CHALLENGE #1: ACCEPTING THAT MANY PEOPLE NOW CONTROL
YOUR FATE
If you are P&G, you have a reliance on other firms for distribution.
CVS is a great, long-standing distribution partner, but it has very
different goals from P&G. If you’re the Dollar Shave Club —
which was recently purchased by Unilever to attack the Gillette
business — you have a direct relationship with your customers.
You can observe their behaviour, seeing when they order more,
when they drop off your platform, and how long it took from
when the first time they logged on to when they made a purchase.
You even know where they came from, prior to entering your
virtual store.
rotmanmagazine.ca / 49
 Once a company builds a good recommendation
algorithm, it actually gets better
at doing a lot of other things, too.
If you’re Gillette selling products through a CVS or a Safe-
way, those retailers don’t necessarily have the same vested inter-
est in tracking that data for you. At the front entrance of the store,
imagine being asked by a store attendant whether you came from
Whole Foods before walking in the door or if you came straight
from home. CVS has a vested interest in making the in-store ex-
perience as positive as possible. So, for many businesses today, the
challenge is figuring out how to work within an ecosystem of distri-
bution partners that don’t have the same incentives to collect the
type of data that will allow you to transform your business.
CHALLENGE #2: VARYING INCENTIVES
Even within your own organization, there are people with a vari-
ety of incentives. We recently had a guest in our class who runs a
multi-hundred-thousand person organization, with a large number
of unionized employees. The fact is, these employees have very dif-
ferent incentives when it comes to embracing digital transforma-
tion over the long term — especially with respect to the displace-
ment of jobs. Managing a variety of distribution partners, supply
partners and employees with varying incentives is a real challenge.
One thing we recommend is to clearly understand what your core
business is. Fundamentally, you need to understand what points of
leverage you have: What you rely on, who your distribution partners
are, what their incentives are — and whether their businesses will
be around in the future.
CHALLENGE #3: THE NEW COMPETITORS PLAY BY DIFFERENT RULES
If you speak to anyone at General Motors, Ford or Daimler, they
will tell you that ‘the future is electric’. Newcomer Tesla knows
that the future is electric, as well. But somehow, Tesla is allowed to
make a 100 per cent bet on winning in 2025 or 2030. It’s allowed
to lose huge amounts of money today and raise capital from pub-
lic markets in pursuit of its 2030 vision. Whereas, if you’ve been an
industrial business for 100 years, your shareholders will have very
different expectations. Put simply, when your competitors play by
different rules, it makes it very difficult to manage change.
How to Move Forward
Going forward, what is the best way to address all of this? Follow-
ing are five guiding principles.
50 / Rotman Management Winter 2018
1. ACCEPT REALITY. The starkest difference between the lead-
ers who have been able to drive large-scale transformation
and those who have not, is that organizations that admit re-
ality do better. They recognize that the things that made a
company great in the 20th century will not make a company
great in the 21st century. If you believe that all the things that
made you great are insurmountable, then you may very well
relegate yourself to being the next Borders, which continued
to build more stores as Amazon torpedoed the industry, be-
cause scale being proximate to customers was thought to be
the Holy Grail. But, when you can ship a book next day any-
where in the country, the fact that a bookstore is half a mile
away from my house doesn’t matter. We all have admit to
reality: The game has changed.
2. BE VERY CLEAR ABOUT WHAT YOU ARE OFFERING. Too often, we
fool ourselves into believing that the customer buys what
we sell to them. But, as Harvard’s Ted Levitt has pointed
out, when a customer buys a quarter-inch drill, what they
are actually looking for is a quarter-inch hole — and if you
lose track of that fact, you miss the point. Many of our or-
ganizations believe that customers care about performance
the way we define performance. If that were true, then a
company like Stitch Fix — which sends personalized boxes
of clothes to end-users — would not be growing at the rate at
which it is growing. Of course, it is not the same type of shop-
ping experience that you get when you go to a high-end re-
tailer like Neiman Marcus and ask for opinions; but, it turns
out that figuring out what looks good in different situations
can be achieved via an algorithm. If you really get to the core
of what you do, it will be much easier to think about how data
can supplant those jobs.
3. ESTABLISH A NORTH STAR. GE’s Beth Comstock, who oversees
GE Innovations, has recounted the story of a 2008 off-site
in which former CEO Jeff Immelt forced his leaders to es-
tablish a vision for what would differentiate their business
in the future. All of GE’s leaders agreed that 15 to 25 years in
the future, software-enabled industrial products were going
to be pervasive, because it made sense to collect data to
 predict breakdowns and optimize usage patterns using con-
nective devices. And, once they had established a 15-to-25-
year goal for the business, it became much easier for GE
executives to discuss what they needed to be done in a three-
to-five year timeline.
Anyone can argue about whether a change like electric
vehicle production in the automotive industry is going be
prevalent next year, a year after, or a year after that; but if no
one can argue that 20 years from now, the industry will be
reliant on electric vehicles, then the companies that will win
20 years from now are those who lead boldly in that direc-
tion. Anything they do that sub-optimizes for that 20-year
vision will be counterproductive. If you have such a ‘North
star,’ you can execute and avoid making hazardous decisions
at the expense of your long-term goals.
4. BUILD NEW ORGANIZATIONS, METRICS AND PARTNERS. There are
people who will not prosper in the new economy and part-
ners — whether they be distribution vendors or suppliers —
who will have to be left behind. If you address the first three
considerations, it should become obvious which partners
need to be left behind. This is important, because if you tie
yourself to bringing a number of people with different incen-
tives along, it will become extraordinarily difficult to make
the required changes.
You will still have managers who are incentivized to op-
erate your core business, and shareholders who demand that
you do that job well. At the end of the day, your expansion
into new markets will be funded by the core business that
you’ve successfully executed. However, you need to recog-
nize that the leaders who are focusing on ROI today cannot
compete with competitors who play by very different rules.
The leaders who are great at running today’s businesses
will systematically deprioritize investments in the types
of things that will fend off the next Uber in your industry,
and as a result, you need new organizations and metrics to
move ahead.
Visa did this quite well by splitting off the part of its
organization that was focused on building micro-services
and developer-focused solutions atop its payment platform.
If Visa believes that e-commerce enabled payments are the
future, it’s vital that part of the organization thinks about
that all the time — even if it’s not necessarily the core of the
business today.
5. ENLARGE THE PIE. The good news is, digital is not a zero-sum
game. The economy continues to grow globally, and if it
grows at three per cent, it will double in 20 years. Even if it
grows at two per cent, it will double in 30 years. When you sit
down and strategize with your leadership team, you need to
focus on what you can do to enlarge the total pie available to
you. What new services could you add with digital? Which
new user groups could you engage? Who was previously
priced out of the market that you can bring on board if you
have a simple, easy sales process through a digital channel?
In closing
By embracing the five principles outlined herein — accepting
reality, being clear about what you do, establishing a North star,
designing organizations to tackle new opportunities and focusing
on enlarging the pie — digital transformation is possible for any
organization.
Embracing digital transformation has not been easy for any
of the firms that are now leading the way, but it has become nec-
essary. Leaders who deny or ignore what is happening around
them will not stop the market from following its course, and no
amount of denial will keep the world from changing.
Maxwell Wessel is the General Manager at SAP.iO, a division
of SAP that supports early-stage start-ups that will create value
for SAP customers. He is also a Venture Partner at NextGen
Venture Partners and a lecturer at Stanford’s Graduate School
of Business. This article summarizes his recent HBR webinar,
“Creating Value in a Digital Economy,” which can be viewed online.
rotmanmagazine.ca / 51
Making Digital
Transformation
A Reality
Senior leaders from TD Bank, IBM, GE Healthcare and Scotiabank
describe how they are embracing — and enabling — digital transformation.

IN MOST OF TODAY’S ORGANIZATIONS, data underpins every transac-

Glenda Crisp tion, operation and interaction. And yet, the ability to extract its
value and convert it into actionable business insights remains elu-
Senior Vice sive to many. Based on our experience, the management, care,
President and protection — in short, the governance of data — forms the founda-
tion that enables powerful data-driven insights to emerge.
Chief Data Data governance addresses some fundamental questions:
Officer, TD Where is our information? What data is critical? How can we get
at it when we need it, in the form we need it in? Can we trust it?
Bank Group And, How do we manage it?
Four years ago, the emerging consensus within TD Bank

+ Group was that more could be done to meet growing expecta-

tions to use data to add value to the customer experience. To gain
a deeper understanding of the challenge, TD conducted inter-
views with over 200 of its senior leaders. Among the themes that
Connie Bonello emerged: Data was being managed primarily at the business lev-
el; from an enterprise perspective, the ability to trace the flow of
Associate data and identify data sources could be enhanced; and analytics
Illustrations by Delphine Lee

Partner, and reporting were siloed, with capabilities dispersed between

several teams and systems, resulting in inefficiencies.
Financial Senior executives agreed that the business implications of
these challenges — along with the ever-growing amount of data
Services, TD was collecting — warranted a complete data transformation
IBM Canada program.

52 / Rotman Management Winter 2018

 TD was the first of Canada’s big-five banks to appoint a
Chief Data Officer (CDO) in 2013. The CDO [one of the authors]
is a member of the senior management team, helping to ensure
that the bank’s data strategy is aligned with business priorities
and that the data implications of those priorities are taken into
consideration. Upon joining TD, the CDO established an Office
of the Chief Data Officer (OCDO) in Toronto and Cherry Hill,
New Jersey. The first tasks were to develop an Enterprise Data
Strategy, establish data stewardship roles within the individual
lines of business, and pilot Data-Issue-and-Change and Data-
Quality-Management processes.
TD also engaged senior executives from each line of busi-
ness as ‘Data Sponsors’, to ensure line-of-business data strate-
gies were aligned with the enterprise strategy. Each executive
Data Sponsor is responsible for providing funding, driving data
governance and quality and appointing ‘stewards’. The bank now
has over 300 Data Stewards, who report to the line-of-business
Data Sponsor and are responsible for executing on the data
strategy. Already, projects that engage Data Stewards have real-
ized better outcomes.
One of the key lessons learned during TD’s data transforma-
tion journey to date has been the need to have simple processes
in place to ensure widespread adoption of a data strategy. For ex-
ample, the original data quality process document was 141 pages
long and included 46 steps. Feedback was that it needed to be
streamlined. To address this, TD engaged IBM to conduct a full-
day workshop with its Data Stewards to help simplify the data-
quality processes and enable the adoption of data quality tools.
This resulted in the data quality process being reduced from 46
to 17 steps.
In general, TD has taken a test-and-learn approach to data
governance, piloting everything with the Data Steward commu-
nity and then adapting processes based on real experiences. It
also conducts partnership surveys to get feedback on the overall
effectiveness of its data governance program and to determine
if Data Stewards have the resources and support required to ex-
ecute the strategy. The bank chose to build its own Data Issue
& Change Governance tool — an enterprise-wide repository of
all data issues and proposed data changes. This tool gives the
CDO visibility across the organization and enables her to look for
patterns in issues that arise, which — if solved once — can benefit
other parts of the organization.
For other aspects of its program, TD chose a licensed-
solution approach, implementing IBM’s InfoSphere Informa-
tion Governance Catalog and InfoSphere Information Analyzer.
The former is a data quality profiling and analyzing solution that
helps to derive more meaning from enterprise data, reduces
the risk of proliferating incorrect information, facilitates the
delivery of trusted content, and helps to lower data integration
costs; while the latter is a metadata business glossary and data
lineage solution that encourages a standardized approach to dis-
covering data assets.
Today, TD continues on its quest to build enterprise-data
capabilities. Rolling out Metadata Management and Data Qual-
ity tools across the organization remains an immediate priority.
In addition, TD is developing a job model, career path and certi-
fication program for its Data Stewards.
Success factors identified for the program include line-of-
business support that has a clear understanding of the value of
enterprise-level data governance policies and standards; the use
of automation and technology to facilitate data quality, trace-
ability, monitoring and accountability; and a funding model that
supports foundational investments for enterprise-wide solutions
as well as longer-term goals. Above all else, TD’s investment in
its people — through both the Data Steward community and the
OCDO team itself — has been critical to the success of its data-
governance journey.
The views expressed here are the authors’ own, and do not necessarily reflect
the views of IBM or TD. The information in this article is based on the authors’
understanding at the time of writing.
Continued on next page
rotmanmagazine.ca / 53
Making Digital Transformation a Reality (cont’d)
Jon Zimmerman
VP and General Manager,
GE Healthcare (Seattle)
DIGITAL ISN’T ALL BRAND NEW; many of us have been at this for near-
ly 40 years. I call us ‘digital natives’, and we’re people who have
spent many years working with digital technology, but who re-
main passionate about it and eager to solve the latest challenges
in the industries we serve.
What is new today is the ability to do advanced processing
thanks to significant new ubiquitous connectivity, storage and
computing power. The biggest evolution I’ve seen in my time is
Cloud computing. It is a major game changer. Those of us who
have worked with digital technology for a long time are starting
to figure out how to embrace the power of the new technologies
in combination with what is already out there.
There is incredible digital power in healthcare: The ability
to take a picture inside of somebody’s heart, from the outside —
without disturbing them — is an incredible accomplishment in
and of itself. The question is, could that idea be applied to deliv-
ering better care in more places or to developing better therapies
through applied intelligence? These are the kinds of questions
that keep digital natives engaged.
The outcomes that our customers want us to work with them
on fall into four main categories: clinical quality, operational ef-
ficiency, financial performance and research. We work a lot on
the financial side, because the U.S. has a very complex payment
system. All too often, doctors do great work, but they aren’t paid
for it: If the appropriate information about a patient and provider
54 / Rotman Management Winter 2018
encounter is not received, the payer has the right to deny pay-
ment. Denied cases add up to $2 billion per year.
To address this, we developed DenialsIQ, which contains
algorithms that turn the payers’ confusing codes into plain Eng-
lish, so providers can understand the root cause for the denial.
The hope is that the system can eventually take outputs from
Denials IQ and change how claims are created in the first place,
to avoid problems — creating what I call a ‘self-healing revenue
cycle’. One customer recently told me, ‘We would spend 90 per
cent of the time discovering the cause and 10 per cent fixing it;
now, the percentages are reversed.’
One of the biggest healthcare challenges, operationally
speaking, is that demand far outstrips supply in terms of clinical
professionals, and that will only increase as the population gets
older and sicker. How do you keep up with that? Well, you better
have some really good information systems in place, to facilitate
the best possible flow of information and care. We need tools
to help doctors and nurses be more efficient in their daily work,
and that’s a big part of what we do.
I don’t really believe in artificial intelligence. First, there is
nothing artificial about the intelligence generated from comput-
er algorithms. It is real intelligence. It can be impactful to all the
things we just talked about — clinical, financial, operational and
research outcomes. Secondly, I also try to help our colleagues and
customers realize that if intelligence is not applied, it doesn’t re-
ally matter. If there is a discovery in terms of efficiency, quality
or finances, our customers expect us to put it to work to create an
outcome for them. In my time, I’ve seen way too much innova-
tion for the sake of innovating — but not really moving the ball for-
ward to achieve an outcome. That’s why we try to have a discipline
whereby all the ‘intelligence’ that we can generate with these new
computing capabilities and networks is applied to a problem. That
way, it’s sustainable and valuable, and it meets customer needs.
One of the biggest challenges for any company is getting to
a place where you have consistent data across the organization.
Before you can start working to make your data consistent — or
to ‘normalize’ it, as we say — you first have to understand its cur-
rent state: What you are capturing right now, where it comes into
the system, how it gets there, etc. The reason data is so variant
across organizations is simple: We’ve had 40 years of computer
systems that have basically been run out of context with one an-
other. That’s why data is so diffused.
Once your data becomes normalized, you can start to discov-
er patterns across your various systems — and it is those patterns
that will help you identify inefficiencies or quality disparities.
Thayde Olarte
Vice President, Consumer &
Micro-Finance, International
Banking, Scotiabank
AS WE WORK TO MOVE THE BANK FORWARD DIGITALLY, we are taking
a holistic view that has four parts to it. First, the customer is at
the centre of everything we’re doing. Second, we are building
partnerships with fintechs and other organizations to help us
leverage our digital transformation. Third, we are fostering a
culture where everyone becomes more agile by enhancing our
processes and investing in technology. And fourth, innovation is
key to our approach. Each and every Scotiabanker is expected to
‘own’ innovation.
We have been very ambitious in setting targets for 2021. By
then, we aim to be the leading digital bank in our key markets.
In my role, I’m responsible for creating a bridge between the fin-
tech ecosystem and the bank. At the moment, we’re particularly
focused on the Pacific Alliance countries — Mexico, Chile, Peru
and Colombia, but we have a global mandate. In order to collabo-
rate with fintech, we need to have access to venture capital, incu-
bators and accelerators. The goal is to be ahead of the game and
accelerate innovation.
Our fintech partnerships are mainly about one thing: learn-
ing. We have so much to learn from them, with respect to how
they work, the models they use, and how focused they are on
the customer. They also inspire us with how lean and agile they
are. We’ve got a lot to learn. The second piece is about gaining
the required capabilities to enhance our position. We need to use
the experience and capabilities of our people more effectively.
And the third piece, of course, is investment. We have to invest
in the most promising fintechs that will help us progress to a digi-
tal leadership position.
Two of the fintechs we’re working with are based in Mexico.
One is a financial comparison site which works as a digital lead
originator for several products in that market; and the second
one is a digital small business lender leveraging non-traditional
data to adjudicate loans. The beautiful thing about these partner-
ships is that the fintechs recognize that they also have a lot to learn
from us — from a regulatory, legal and operational perspective.
For example, we can teach them how to handle a critical mass of
customers.
Partnering with fintechs does present some risk, but it is a
type of risk that can be kept under control. Two years ago, I would
have said I was very concerned about being disrupted by a fin-
tech; but today, frankly, we are not concerned, because we have
faced up to these disruptive forces, and we now know that Fin-
techs are not going to have a future without the big banks.
Millennials are important to our strategy going forward,
and we are already targeting this group in the Pacific Alliance
countries, learning about what works best for them. As part of
the customer life cycle, we need to develop appealing products
and services for these people as they age. We recognize that we
have to start early, but at the same time, we have to be ready for
their future.
For any organization to embrace digital transformation, it
has to start at the very top, so that the message cascades down.
Having a CEO who is committed to digital transformation is very
inspirational for people; but at the same time, as we say every
day, everyone in the bank owns our digital transformation. On-
going learning about the latest tools is a big part of that; that’s
how we aim to improve our ‘digital IQ’ as a company. In our view,
the future of retail banking is not about, ‘What product should we
launch next?’ It is all about customer empowerment — and I believe
that is true for any type of service organization.
rotmanmagazine.ca / 55
CEO Spotlight:

Staying Relevant
in an Age of
Transformation
Large, established corporations often have trouble staying relevant
over time. Not so for Estée Lauder. CEO Fabrizio Freda explains.
Interview by Karen Christensen

When you joined the Estée Lauder Companies, its market cap
was $6 billion; today, it is $35 billion. How did you accomplish
this feat?
First of all, it was a team effort. When I arrived in 2009, Wil-
liam Lauder said to me, “Don’t give me any solutions right
away; just listen, understand — and then create.” The fact
is, he set me up for success. He designed this corporation so
that each of our brands is run independently, with each brand
president responsible for his or her brand, P&L and strategy.
We don’t have a central CMO making decisions for multiple
brands, and in my view, that kind of focus provides a competi-
tive advantage.
Prestige beauty — and our company, in particular — is closely
connected to fashion and the arts. I recognized right away that
there were a lot of really creative people here. I quickly decided
that I would focus on their strengths and leverage their creativity.
Early on, I felt we needed to diversify our revenue and cre-
ate multiple new ‘engines of growth’, meaning diversification
in brands, categories, geographies and channels. I asked our
leaders to think about the typical consumer’s bathroom and
makeup bag, and what products were in there. The fact is, pres-
tige beauty consumers no longer buy a whole regime and stick to
it forever; in the beauty business — even if consumers love your
product — trying new things is part of the fun. People might be
loyal to a few core brands, but today’s consumer has, on average,
12 to 15 beauty products in her life at any one time. Strategically, I
knew that if we had a portfolio of multiple brand offerings, there
was a good chance that one-third to half of those products could
be our brands.
Geographically, you also diversified and focused on places
that most companies were ignoring, like Eastern Europe, Lat-
in America and Turkey. Why did you choose this approach?
A key aspect of our strategy has been to focus on ‘the travel-
ling consumer’. We studied where people were going, why they
were going there, and how they were spending their money. We
found, for example, that the Chinese travelling consumer wants
to go to Paris to buy her luxury handbag as a status symbol; so,
we ensured that some of the same beauty products she would
see at home were available in Parisian stores and airport retail

rotmanmagazine.ca / 57
 We focus on innovating for our most discerning customers,
because when you do that, there are ripple effects.
stores. The results have been impressive. We have also target-
ed Brazilian tourists, who often travel to Miami and New York.
Brazilians love colour in their cosmetics, so they are huge fans
of M·A·C Cosmetics. At our Times Square M·A·C store, they
make up over half of the sales volume. This strategy has been
one of our engines of growth.
We also focus on innovating for our most discerning cus-
tomers, because when you do that, there are often ripple effects.
For example, in Russia, one of the most important things to a fe-
male beauty consumer is her eyelashes. If you want to win the
hearts of the Russian consumer, you must offer a black mascara
that thickens and lengthens lashes so that they stand out as the
most prominent feature. So, we created a mascara that accom-
plished all of that. Of course, Russian consumers aren’t the only
ones who want a great mascara — so we leveraged that innova-
tion and sold it around the world.
We were also pioneers in online beauty. Under William
Lauder’s leadership — and ahead of the industry curve — the
company launched its first e-commerce sites for Clinique and
Bobbi Brown in 1996, and William created the ELC Online di-
vision for all of our brands in 1999. Because his ideas were so
future-oriented, he encountered some initial resistance. The
general feedback went along the lines of: ‘Women want to smell
fragrances in the air and have their make-up done by profession-
als; they don’t want to buy it online!’ When I joined, I recognized
that we were at the forefront of beauty e-commerce, but we
needed to roll it out globally. Today, online is our fastest grow-
ing channel: E-commerce and mobile commerce generate sales
of more than $1 billion a year and are growing 25 per cent, with
strong gains across brand, retailer and third-party sites.
Of course, change never stops, so we are now actively pivot-
ing our distribution to the fastest-growing channels worldwide,
to reach consumers where they are shopping today. For example,
Ulta is a speciality multi-retailer in the U.S., and for the first time
ever, M·A·C products are being sold there. ‘Specialty-multi’ is
one of the channels favoured by younger customers, and we are
reaching these new consumers and sourcing from mass beauty
by introducing more of our prestige brands with the appropriate
retailers to capture more of this important demographic. We de-
sign products, packaging, visual merchandising and education in
unique ways to help young consumers navigate these locations.
58 / Rotman Management Winter 2018
In summary, our success is powered by a strategy that is
rooted in multiple engines of growth across all aspects of our
business — brands, categories, geographies and channels. We
are not over-reliant on any one category, channel or country,
which has protected us from regional economic slowdowns and
political strife.
Tell us about your growing focus on Millennial consumers.
In past generations, younger consumers learned about beauty
products from their mothers, who would take them to the near-
est department store to invest in their first skincare regime. But
today, the consumptive patterns of Millennials are having an in-
fluence on all generations’ buying habits.
As consumers embraced shopping online, their activity
moved from computers to tablets to smartphones. Millennials
began to spend a lot of time watching beauty tutorials on You-
Tube, so by the time they arrived at a store, they knew what
they wanted. This changed the way we thought about market-
ing: Instead of listening exclusively to popular magazines, Mil-
lennial consumers themselves were looking to be the influencers
for their peers. We had come to a place where the future could
not be informed by the past, and we realized that to thrive in this
environment, we would have to learn from consumers and give
them a ‘share of voice’.
About three-and-a-half years ago, we formed a group of
high-potential Millennial employees and paired them up with
our executive team. One by one, these Millennials took execu-
tives shopping. Many of our executives were not as savvy as they
are today with social media, and this experience allowed them to
see first-hand how this important demographic uses social me-
dia, and how smartphones impact a typical shopping excursion.
It was clear to me that we needed to make this ‘reverse
mentoring’ scenario permanent, so we set up our first Millennial
Advisory Board. Right now, Clinique has a collaboration with de-
signer Jonathan Adler, and before the collection was launched,
we put it in front of the Clinique Millennial Advisory Board and
said, ‘Would you buy this?’ They loved it! Today, we have 40 Mil-
lennial Advisory Boards across the globe. Most of our brands
and regions have them, and some of our different functions.
We’re about to set one up for packaging, because that can be such
a key part of what makes for an ‘Instagramable’ moment.
 Every regional president and their leadership team is now
partnered up with a Millennial reverse mentor, and they go on
experiential retail excursions at least twice per year to stay cur-
rent. Our lead Millennial is my personal mentor, and she pre-
pares a bi-monthly report on the most compelling retail, social
media and experiential retail activities across the fashion and
beauty industries. Our reverse mentors have their own online
brainstorming portal, called Dreamspace, where they post every-
thing they feel is compelling and share why they like it. We select
the ‘best of the best’ and send out a bi-monthly newsflash to all of
our practitioners in the consumer-engagement space and to our
executive leadership team. Our Millennials are truly influencing
and educating us; it’s been incredibly valuable.
How do you select these young mentors and Advisory Board
members?
All of our reverse mentors and Millennial Advisory Board mem-
bers are employees of our company, so they know about the
program and they usually raise their hand to become part of it.
They recognize that it requires a real commitment on their part,
because this is all done on top of their day-to-day job. But three
benefits come from it: First, their participation in the program
gets noted in their annual performance review, where it is made
clear that they are ‘leading and innovating from their chair’. Sec-
ond, it hones their leadership skills, because in order to be a men-
tor to an executive, you have to have emotional intelligence and a
knowledge base to present yourself in an influential way. Last but
not least, it increases employee engagement, because Millen-
nial employees are connected in a community globally related to
something that they’re all passionate about — and that they know
is sponsored by the CEO. It’s been a great retention strategy for
our high-potential employees.
You have called yourself a ‘structured creative’. What does
that mean?
When I joined Estée Lauder, I wanted to define what leadership
means at this company, so I wrote down what I believed to be the
nine most important leadership competencies, and categorized
them under three headings: leading yourself, leading others and
leading the organization. One of those competencies is ‘fostering
and leading creativity and innovation’.
I had studied some interesting research showing that there
are two types of employees: ‘structured’ creatives and ‘blue-sky’
creatives. There is even a ranking scale, so you can see where you
fall on the spectrum. Structured creatives (like me) take existing
knowledge and connect the dots in new ways to come up with
something new; while blue-sky creatives come up with brand
new ideas and then have to figure out how to make them come
to life. Given that everyone falls somewhere on this spectrum,
I really believe in fostering creativity from every single chair in
our organization.
We make this happen by promoting a ‘test and learn’ men-
tality. If someone has an idea, they are encouraged to build a
business case, test it, learn from it and share the learnings. Some-
times they will only learn what doesn’t work; but more often than
not, they find the kernel of a great idea.
I visited the Rotman School of Management last year
and saw a presentation by Mark Leung [director of Rotman
DesignWorks] and Sarah Kaplan [Professor of Strategic Man-
agement] that really impressed me. We had hired one of your
2016 graduates, Kaylee Stewart, who spent half of her time at
Rotman in our design lab with Mark Polson, our Vice President,
Global Learning & Development. In addition to her day job in
social media, Kaylee and our Canadian GM will be rolling out
our first design thinking test-and-learn approach to our Canadi-
an affiliates, as we continue to embed this approach throughout
the organization.
You have spoken of the importance of being mindful about
the ‘roots’ and ‘anchors’ in an organization. Please explain.
The art of leading change is about two things: Knowing what
needs to be preserved (the ‘roots’) and what needs to be changed
(the ‘anchors’ that are weighing you down). When I first joined
Estée Lauder, I asked myself, ‘What do I need to preserve and
what do I need to change?’ As indicated, I realized that I needed
to accelerate and fully leverage the creative strengths of the tal-
ent that was already here.
What are the pros and cons of working for a family-owned
firm?
I feel honoured to be working with such an amazing family. In
my career, I’ve had the experience of working for a number of
rotmanmagazine.ca / 59
 ‘Structured creatives’ take existing knowledge and connect the dots
in new ways; while ‘blue-sky creatives’ come up with brand new ideas.

blue-chip companies, and I believe, frankly, that family busi- You believe the biggest risk for today’s leaders is not chang-
nesses are the best. They bring an authenticity that can’t be ing fast enough. How do you approach this challenge?
matched, and they are invested in the future. Like so many, our industry is changing profoundly, and that pro-
William Lauder broke the mould for the prestige industry cess will only continue. We aren’t simply moving from Point A
in so many ways. In addition to being one of the first in our in- to Point B. Change is fluid, like the currents of the ocean. As the
dustry on the e-commerce wave, in the 1990s, he realized that speed of change continues to increase, what helps a lot is hav-
we needed to go into emerging markets — at a time when there ing an entrepreneurial mindset — both in our bigger brands, as
weren’t many prestige beauty players there. He also recognized, well as in our smaller brands, like BECCA, which we recently
early on, that we needed to express our brands in new store acquired. Whenever we make an acquisition, we ask ourselves,
formats. When he created Origins, he launched it with a free- ‘What can we learn from this company that might apply to all
standing store model — at a time when there was no such thing of our brands?’ For instance, with Too Faced and BECCA, we
in prestige beauty. When I came in, I was amazed — and I real- learned a lot from their amazing ability to leverage influencers
ized that my challenge was to take it all even further. Of course, and social media tactics, and we have the ability to apply these
our founder, Estée Lauder herself, was an entrepreneur as well best practices company wide.
as her son, our Chairman Emeritus, Leonard Lauder. Lastly, as an organization, you always need to have a learn-
William likes to say, ‘Yes, we have to make our quarterly ing mentality. With technology, retail models, social media and
numbers; and yes, we have to deliver a profit in our top line analytics, we are going through a transformational moment right
growth. But we will never make a short-term decision detrimen- now. But the key ideas — quality products, creativity, valuing sus-
tal to the long-term in order to deliver for the quarter’. That’s the tainability and respect for individuals — those things are never
best part of working for a family-owned firm: We make decisions going to change.
with the long-term view in mind. William speaks about ‘patient
capital’, meaning capital that is in it for the long-term. A good
part of our success today reflects my team’s ability to fully lever-
age the innovative actions and investments that William had the
foresight to make.
Managing that delicate balance with analysts is an art and a
science, and as a result, it’s a challenge. But I also view it as a pro,
because it forces us to be agile and to pivot sometimes. When
something happens in the world, we have to think about, ‘What
levers can we pull?’ Volatility and uncertainty have increased
exponentially. It could be a change in consumer mindsets, a ter-
rorist attack or a natural disaster; these things can happen at any
moment, so it’s important to know how to pivot and where to
move your resources.
I need to reiterate that, in joining this company, I was dealt
a great hand: the best people, terrific brands, a history of creativ-
ity and innovation — and a great partner, in William. Together,
Fabrizio Freda is President and Chief Executive Officer of The Estée Lauder
we faced one of the most daunting recessions this world has ever Companies, based in New York City. He previously held executive positions
seen and by partnering to lead change, we came out on top. at Procter & Gamble and Guccio Gucci S.p.A.

60 / Rotman Management Winter 2018

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A start-up isn’t a ‘company’ in the traditional sense; it’s a learning machine,
says serial entrepreneur Daniel Debow (Rotman JD/MBA ‘00).
by Karen Christensen and Sharon Aschaiek
THE NEWS IS BOTH DISCOURAGING AND ENCOURAGING for today’s
would-be entrepreneurs. First the bad news: Nine out of 10
start-ups fail. But, on the really bright side, as technology con-
tinues to evolve, virtually everything is open to better ways of
doing things. As a result, PayPal co-founder Peter Thiel advises
would-be entrepreneurs to ask a simple but powerful question:
What valuable company is nobody building?
Of course, answering that question requires a lot of hard
work. Just ask Daniel Debow (Rotman JD/MBA ’00).
Back in 2007, Debow was at the office sorting through his
mail when he saw an invitation to yet another high-tech confer-
ence. Instead of tossing it in his circular file, he took the time to
read the details: MESH (‘Canada’s Web Conference’) was to be
held in Toronto, and it was aimed at people who wanted to con-
nect with others who ‘are as excited about the potential of digital
technology as you are’.
As one of the founding executives of Workbrain — the
workforce-management software company that had just been
sold for $227 million to U.S.-based Infor Global Solutions —
Debow certainly fit the profile. At the time, he was eager to meet
top local talent to work with him on his next venture — so he
signed up.
What he couldn’t have known in advance was that he would
meet his future business partner at that conference.
Debow’s own appetite for entrepreneurship had been whet-
ted years earlier. In 2000, while he was studying for his JD/MBA
at the Rotman School of Management, his best friend’s older
brother, serial entrepreneur David Ossip, gave him an opportu-
nity to work with him on Workbrain, which he founded. Debow
and fellow classmate Matthew Chapman (Rotman MBA ’00)
wrote the initial business plan for Workbrain while they were
still students.
At the MESH Conference, Debow was in his element. He
met lots of smart and interesting people that day and, in a case of
serendipity, one of them was Farhan Thawar (Rotman MBA ‘07)
— a part-time Rotman MBA student who also held a Math degree
from the University of Waterloo and had already held senior
positions at Microsoft and Celestica.
rotmanmagazine.ca / 63
 Thawar told Debow about his current role at Microsoft,
where he created and ran the most advanced search-relevance
lab outside of Redmond, Washington. He explained how he sup-
ported the roll-out of new features and bug fixes for 18 million
Canadians on the Finance, Automotive, Entertainment, Video,
Search and Homepage channels.
Debow was suitably impressed: He wanted to hire Thawar on
the spot to work with him on his next venture. “Farhan was clearly
the best engineering leader in Toronto,” he says. While Thawar
was interested, the timing just wasn’t right, so the two promised to
stay in touch and work together on a start-up someday.
Later that same year, Debow co-founded Rypple — a social
performance management platform — with his former Work-
brain colleague David Stein and George Babu (Rotman JD/
MBA ‘09). When they met, Babu was still a Rotman student who
was eager to get to work on a start-up. As Debow tells it, Babu just
began ‘showing up’ at the as-yet-unnamed start-up’s office after
class — leading Stein to ask Debow one day, “Does this guy work
for us?” Soon enough, he did; and a few short years later, in 2012,
the trio sold Rypple for $65 million to Salesforce.com.
Babu went on to co-found Kindred — whose mission is to
build machines with human-like intelligence — along with Rot-
man Professor Ajay Agrawal; while Stein founded Leaders
The Entrepreneurial Mindset @Work
Early in my career, when I was working at Trilogy Software,
one of my fellow managers was never at his desk. When I did
see him, he seemed to be doing really random things — talk-
ing to one person, going for coffee with another, or just stand-
ing around looking at people. And yet, his teams performed
excellently. I wondered if luck had bestowed upon him a pack of
A-players — enabling him to get by doing nothing as a manager.
For a while, I believed he was hopeless; but then I discov-
ered something powerful: This individual spent all of his time
helping people. Those ostensibly random activities I had noted
were his way of unblocking his team and paving their way to
success.
I soon changed my own behaviour and started to ‘work
for’ my team — and I’ve carried that practice throughout my
career. Whether I manage five (as I did at first) or 300 (as I did
at Xtreme Labs), my main goal is to help people do their jobs.
I always volunteer for the unpopular jobs; and if my people are
blocked, I work as hard as I can to unblock them. To an outsider,
64 / Rotman Management Winter 2018
Fund, a firm that invests in fast-growing enterprise software
companies. Debow took on a role at Salesforce, working to in-
tegrate the company with Rypple. Once it was transformed into
Work.com and repositioned as a sales-performance tool, he took
on a new challenge for the company: Using the Salesforce plat-
form to build ‘wearable apps’.
Meanwhile, Thawar left Microsoft in 2008 to become Chief
Software Architect at Achievers; helped start Canada’s first y-
Combinator-style incubator, Extreme Venture Partners, which
funded eight companies in three years; and then served as VP of
Engineering at mobile-development firm Xtreme Labs — which
he helped to scale from 10 to 250 people, building some of the
world’s most popular mobile apps. The firm was acquired in 2013
by U.S. software development consulting firm Pivotal Software,
and Thawar accepted the role of Chief Technology Officer, Mo-
bile, at Pivotal.
All of this time, Debow and Thawar stayed in touch, and
by late 2015, the timing was finally right: The two were ready to
work together. They rented a small office near St. Clair Avenue
and Bathurst Street — midway between both of their homes —
and set up shop to devise their next venture. Right around that
time, serendipity struck again: Debow was back at the University
of Toronto, speaking to the JD/MBA Students Association, when
it might look like I’m not doing much, but the value accruing to
the company is tremendous. There are three main reasons:
1) To be creative, your people need a threshold level of
responsibility
In order for someone to do her best work, she needs to feel and
understand the problem. She’ll never grow wings if she’s never
forced to fly. The conflict and struggle of fixing one’s own prob-
lems is the key to creativity. This is why people should work for
themselves and only ask for help from managers when they need
it. This way, the company benefits by having far more people
working on creative solutions to problems. Command-and-con-
trol works for organizations like the army, but not for knowledge
workers: You need each of your people to spread their wings.
2) Your people need missions and authority to reach peak
productivity
People have to shed their chains to do good work. A typical
he met David Pardy (Rotman JD/MBA ‘16).
Pardy — who also holds a BSc in Physics and Math from
Queen’s and a Certificate in General Management from Stan-
ford — told Debow of his keen interest in joining a growth start-
up. Debow invited him to informally assist with his new venture
and — impressed with his bright ideas and drive — he and Thawar
brought Pardy on board as an official co-founder of their yet-to-
be-defined company.
With a founding team in place, the hard work began in ear-
nest for the three Rotman graduates.
“Our process was deeply influenced by [former Rotman
School Dean] Roger Martin’s thinking — as well as by Four Steps
to an Epiphany by Steve Blank and The Lean Start-up by Eric
Ries,” says Debow.
Following Martin’s advice from Playing to Win, the trio began
by deciding ‘Where to play’. They created an initial filter for their
ideas by asking, ‘What do we want to achieve?’ and ‘Where do we
want to spend our time?’ They knew, for instance, that they didn’t
want to build a car parts factory. “We wanted to create something
that would make everyday life easier and more productive for as
many people as possible. And, to paraphrase Wayne Gretzky, we
weren’t interested in where the hockey puck was, but in where it
was going to be.”
manager might give her subordinate a task and micromanage
until it looks like what they want. I prefer to ask my people to
build something that solves the pain. For example, I asked one
of our Helpful product designers to help solve a pain point:
Some users wanted to use the app, but they didn’t use their
phones. The mission was to build web functionality for ev-
erything into our app. The output looked nothing like what I
expected; but it was fantastic.
3) Mistakes are how people learn — and how you learn
As a manager, your job is not to prevent people from making
mistakes. Don’t worry about mistakes. In reality, there
are extremely few catastrophic mistakes that people can
make. Your job is to set a tone that making mistakes is
okay — as long as people learn from them. Make your own
mistakes. Bring a mindset of learning to everything. Explicitly
call it out: ‘I thought X was right, but turns out I was wrong
and Y is better.’
Their shortlisted ideas included a free, for-profit university;
a home maintenance service; a LinkedIn-style networking plat-
form for blue-collar workers; and a super-intelligent AI-powered
employee directory.
“For each idea, we used Roger’s approach by asking, ‘For
this to be successful, what four or five things have to be true?’”
The team worked through each idea, posing that question and
coming up with what amounted to a series of hypotheses — a list
of things that had to be true for the idea to be a winner. Next, they
ranked each hypothesis, from ‘easiest to disprove’ to ‘hardest to
disprove’. If one of the ‘proof points’ was very unlikely to ever
happen, that idea was discarded.
“Our focus was very much on, ‘What can we dis-prove the
validity of?,’” says Debow. “We were actively trying to prove
ourselves wrong. And if we couldn’t — if all the things that ‘had
to be true’ were indeed plausible — we kept that idea alive.” For
the ideas that made it through to that critical stage, the team built
rough prototypes and tested them out with people to gain critical
feedback and iterate to improve them.
Ultimately, they settled on the idea for an AI-powered em-
ployee directory that would enable people across an organiza-
tion to know what their colleagues were working on, and how
that work was progressing, in real time. “When we tested the
I have learned that you have to explicitly and emphatically
advertise your own mistakes. At Pivotal, I once called some-
one by the wrong name and a colleague said, “Woah, you make
mistakes!” I was floored. Did he think I never make mistakes?
Clearly, my mistake was to not showcase my mistakes. Doing
so helps people get rid of their fear — unleashing autonomy
and creativity.
Conclusion: Your org chart is upside-down. Flip it.
- Farhan Thawar
rotmanmagazine.ca / 65
PHOTO: SHARON ASCHAIEK
Helpful’s founders: Rotman graduates Daniel Debow, Farhan Thawar and David Pardy.
prototype, users and CEOs alike told us, ‘We need this tool: You
should go ahead and produce it.’”
As indicated, the team didn’t do much traditional market
research. “We were largely guided by our intuition about what
we felt was a really big problem for lots and lots of organizations:
employee knowledge sharing. We had experienced this ‘pain
point’ ourselves — and lots of people told us they felt it, too.”
The group worked for nine solid months on the employee di-
rectory idea. But all of a sudden, something just didn’t feel right.
Instead of ignoring it and marching ahead, the founders decided
to put the project on hold for a while and clear their heads. They
instructed their employees to spend an entire week working on
whatever they wanted to work on.
The risk paid off. Two of their employees came up with a
promising concept, related to the initial idea: A mobile app that
would enable employees to send each other short videos to share
information about their work — sort of like ‘video voicemail’.
Over the next few weeks, the entire team tested the proto-
type. “Many of us were away from the office, travelling for meet-
ings, and we found that when we used this tool, we felt closer to
our colleagues and more connected to them. We just didn’t feel
that usual pain point of being separated from our team.”
Not to mention, they didn’t have to write as many long
emails to each other, which was an added bonus — and led to less
misinterpreting of the tone and content of their email messages.
“The three of us looked at each other one day and said, ‘This
is even better than our original idea.’”
The trio made the tough decision to pivot and change their
focus. And it wasn’t all based on gut instinct: Based on their earli-
er research, they knew that employee engagement is a huge pain
point for today’s organizations. According to Gallup, fully 70 per
cent of employees are not engaged with their work. Several other
pieces of data encouraged their decision: Video content is ex-
pected to account for 75 per cent of the world’s mobile data traffic
66 / Rotman Management Winter 2018
by 2020; by 2022, mobile workers will account for 42 per cent of
the global workforce; and every single day, people send billions
of video messages through Snapchat, Instagram and Facetime.
To date, most of the user and app-development activity in
video messaging had occurred in the consumer space; but the
team felt strongly that the enterprise space was next. Lots of
workplaces were already using Skype and Google hangouts;
but this app would be different. Those tools are what is known as
‘synchronous communication’ tools: You have to be there, at your
computer or device, at the same time as the people you are com-
municating with. This product would be ‘asynchronous’ — so
that users could send a short video message at any time of day to
their colleagues.
“We saw all these different proof points — a constellation of
them — and we just inherently knew that ‘this is going to happen
at work.’ Every organization needs tools that foster more humane
and effective communication.”
The name for their company: Helpful. Debow explains:
“It sounds simple, but the whole reason we wanted to build this
company in the first place was to be helpful to as many people as
possible; we also felt that this tool would lead to a much more
helpful workplace culture — where people would communicate
and share information more often.”
Marshall McLuhan famously said ‘the medium is the
message’, and Debow feels that holds true with Helpful. “What
McLuhan meant is that the form of a medium embeds itself in
any message that it transmits, so that the medium influences how
the message is perceived. If you want to engage people, you need
to use an engaging, authentic, human medium.” Video messag-
ing — with its ability to convey deeper meaning through facial
expression, body language, tone of voice and inflection — can
significantly improve the most important aspect of successful
businesses: Relationships with and between employees.
Available on the Apple and Google Play stores since the start
 If you want to engage people, you need to use
an authentic, human medium.

of 2017, Helpful is already being used by major airlines, banks, Helpful is currently free to use, and the company will even-
grocery chains, tech and creative agencies, and, of course, lots of tually charge a fee for a premium version. The founders say their
start-ups. The team is continuing to enhance its features, func- vision is to not only create a great product that is used and loved
tionality and user interface. by millions, but to more broadly create many high-quality jobs,
Along the way, Helpful’s founders have worked with the Rot- strengthen Canada’s technology sector and contribute to the
man School’s Creative Destruction Lab (CDL) — the seed-stage country’s economic prosperity. Noble goals, to be sure. “We
program for science-based companies that Debow helped to es- have in our hands something that I want to use all the time,” says
tablish in 2012. Through the CDL, Helpful’s leaders have been Debow. “It has transformed how my colleagues and I work with
able to network with top technology innovators and researchers each other.”
affiliated with the Lab — and to put together a powerful team of Some people still believe success has a lot to do with luck;
advisors that includes Microsoft Bing co-creator Barney Pell; but when you dig into the details, it becomes clear that most
director of Apple AI, Ruslan Salakhutdinov; Bloomberg Beta successful people ‘make’ their own luck. They learn how to put
partner Shivon Zilis; and Richard Zemel, who built the Univer- themselves in the right situations, grasp opportunities as they
sity of Toronto’s Machine Learning Lab. arise, allow for randomness, take risks — and most importantly,
The insights that Helpful’s founders have gained about AI they work really hard. Helpful’s founders are a case in point. And
helped them build a speech-recognition capacity for their app clearly, their Rotman degrees didn’t hurt, either.
that transcribes video messages — a feature they consider a key
differentiator between their product and others on the market.
“There are times when you want to send an expressive mes-
sage to someone, but that person is not in a position to listen to
audio. But, if you have to type out the message, that is extra work.
We wondered, ‘Could we use advances in machine learning to
do that typing?’ It turned out that we could. We added this to the
app, and it made the experience that much better,” Thawar says.
A startup isn’t a ‘company’ in the typical way people think
about it, says Debow. “It’s more of a learning machine.” About
80 per cent of the original code for the app was changed along
the way, as they iterated the product. At each of his ventures to
date, he has either partnered with or hired graduates of the Rot-
man School, which he calls ‘an incredible talent magnet.’ Help-
ful’s backstory not only reflects the talent, ingenuity and grit of
its founders — it is a testament to the Rotman School’s capacity
to nurture graduates who are interested in veering off the beaten
path of consulting or banking to start their own companies.

rotmanmagazine.ca / 67
Sense

Seize

Transform
 Seize Opportunities—
Your Organization
Three dynamic capabilities — sensing, seizing and transforming—
can help an organization extend its resource base.
by George S. Day and Paul J.H. Schoemaker
WHY ARE SOME FIRMS SO ADEPT at anticipating and exploiting the
opportunities created by technology and rapid change, while
others struggle to keep up — or worse, go out of business?
We believe the answer is linked to the concept of ‘dynamic
capabilities’. Developed by Haas School of Business Professor
David Teece and his colleagues, this framework shows that three
dynamic capabilities — sensing, seizing and transforming — en-
able firms to sense opportunities sooner than their rivals, seize
them more effectively, and support the organizational transfor-
mation that this entails.
In this article, we will describe how we have advanced
Dynamic Capabilities Theory by adding sub-capabilities to the
framework. We will also show how leaders can make smart
choices about which capabilities to develop in order to thrive in
an era of continuous change.
DYNAMIC CAPABILITY 1: SENSING OPPORTUNITIES
The ability to sense emerging threats and opportunities is funda-
mental to a firm’s ability to adapt to volatile markets, technologi-
cal uncertainty and unpredictable competitors.
Our research finds that successful sensing can be under-
stood through two interrelated learning processes that function
as dynamic ‘sub-capabilities’ of sensing.
Sub-Capability 1: Peripheral Vision
The intent of this capability is to see signals of potential oppor-
tunities and nascent threats sooner than your rivals. As with
human vision, the periphery is the fuzzy zone outside the area
of primary focus. For organizations, the periphery is difficult to
scan because of an adverse signal-to-noise ratio. Information
overload, distributed intelligence and confusion are serious im-
pediments to improving peripheral vision. To address this diffi-
culty, a strong peripheral vision capability requires two critical
actions.
SCOPING. Managers can use three guides to ensure that their
scope is neither too broad nor too narrow:
Learn from the past, by analyzing past blind spots or finding
an instructive analogy from other industries.
Examine the present to focus on signals that are right in front
of your leadership team but are not yet noticed or appreci-
ated. Most surprises have some antecedents; however, peo-
ple have powerful tendencies to ignore warning signals and
pretend that ‘all is well’. There is much to be learned from
mavericks, outliers and defecting customers.
rotmanmagazine.ca / 69
 It’s not about having all the answers —
it’s about asking the right questions.
Envision new futures. This can be aided by scenario think-
ing, since this method aims to magnify important weak sig-
nals by providing a broader context that makes them more
salient. If different scenarios highlight a particular weak
signal, which may have more or less strategic significance,
the organization is less likely to be overconfident and be-
come locked into a myopic view that filters out a telling
signal.
SCANNING. There is an important difference between active and
passive scanning. All managers scan, but they often do so pas-
sively. They are continually exposed to a wealth of data, ranging
from the fuzzy impression of trade rumours to harder evidence
from their performance measures. Passive modes of scanning
tend to reinforce rather than challenge prevailing beliefs. Ac-
tive scanning reflects intense curiosity and pushes the inquiry
into the periphery. Active scans are often hypothesis-driven,
and whenever critical issues are involved, competing hypoth-
esis should be tested. Organizations pursuing multiple theories
may mount ‘search parties’ using teams of outsiders and insid-
ers, with a diverse portfolio of enquiry methods.
Sub-Capability 2: Vigilant Learning
The next sensing sub-capability requires interpreting the sig-
nals you collect in an exploratory and vigilant manner. Vigi-
lance in this context refers to a heightened state of awareness
and curiosity, characterized by alertness, curiosity and a will-
ingness to act on partial information. Vigilant learning requires
four actions.
FOSTERING A ROBUST MARKET ORIENTATION. Successful firms have
superior skills in understanding customers and competitors,
and in attracting as well as retaining highly valuable customers.
Thus, they are able to make decisions from the outside-in.
FILTERING OUT THE FILTERERS. Consider an organization that was
‘surprised’ by some circumstance or event. Usually there were a
handful of people, within the organization or its extended net-
work, who knew what was at stake — but failed to raise their
voice. Senior decision-makers did not know how to identify
and/or empower those people to speak — and conversely, these
individuals lacked full understanding of the implications of
their knowledge. Frequent and wide communication, with an
70 / Rotman Management Winter 2018
exploratory frame of mind, can help to overcome the problem
of distributed intelligence in organizations.
SUPPRESSING BIASES. Prevailing habits of thinking can inhibit an
open-minded interpretation of ambiguous information. While
groupthink is particularly pernicious, the common human ten-
dency to jump to the most convenient conclusion, and then seek
evidence to confirm that judgment, further distorts the picture.
‘TRIANGULATING’ PERSPECTIVES ON A COMPLEX ISSUE. Renaissance
artist and inventor Leonardo da Vinci emphasized the vir-
tue of looking at things from at least three different points of
view. Just as a GPS uses three coordinates to place you on a
map, managers should use multiple enquiry methods to clarify
ambiguous signals, and then probe deeply to learn more about
promising patterns.
DYNAMIC CAPABILITY 2: SEIZING OPPORTUNITIES
In every industry, there is a graveyard of early adopters, indicat-
ing that it seldom pays to commit completely to a new initia-
tive. Instead, a judicious approach includes the following sub-
capabilities.
Sub-Capability 1: Probe-and-Learn Experimentation
Small, well-designed experiments that explore new strategic
initiatives allow for the type of sequential investments that are
most likely to generate positive results. For example, rapid pro-
totyping, via quasi-experimental designs, can greatly aid com-
plex design decisions.
The best firms elevate this practice to a dynamic capability
that can be deployed on many fronts, provided three conditions
are met. First, the enterprise must nurture an experimental
mindset, including a willingness to challenge existing beliefs.
Second, teams employing this method must be able to codify
and share their insights. New software tools, including advanc-
es in data analytics, can help teams keep track of test and con-
trol groups as well as help identify the attributes that most affect
performance. Third, firms must look beyond their own organi-
zational and market boundaries, probing for insights from a
wide array of peer companies, precursors and network partners.
Importantly, trial-and-error learning requires leaders to
actively cultivate and support a culture in which mistakes are
tolerated and even encouraged at times. Although careless
failures should be avoided, no organization can learn if it pur-
sues a policy of zero tolerance for failure.
Sub-Capability 2: Deploying Real Options
Trying different things, probing puzzling questions deeply, and
being alert to the unexpected are all valuable ways to learn faster.
Sometimes, to get closer to true market insights, a significant
financial investment is required. This is where real-options ap-
proaches are especially useful, since they entail a small bet to
preserve the right to make a further strategic move, but without
any obligation. The purpose of real options is to improve the
firm’s strategic position in the face of uncertain external change.
For example, a company might bet modestly to understand a
new technology or market, either by supporting research in its
own lab or through an investment in a startup. This buys the firm
an option to pull the plug if its initial investment sours, while
preserving the opportunity to invest more once the pilot project
looks sufficiently promising.
DYNAMIC CAPABILITY 3: TRANSFORMING
As indicated, sensing and seizing capabilities can create new op-
portunities, but their full potential can only be realized if a firm
properly executes on its new strategies — which will require some
degree of organizational transformation. This third component
refers to a firm’s ability to adjust its internal organizational design
as well as its potential to navigate — and even shape — the exter-
nal environment.
Sub-Capability 1: Organizational Redesign
Many large companies establish separate organizations dedi-
cated to pursuing new endeavours. At their best, these ‘cocoons’
generate internal flexibility and entrepreneurial dynamism.
GM’s Saturn division, IBM’s PC unit, and Roche’s Genentech
are well-known examples. By ‘cocooning’ a new business, a firm
establishes boundaries so that the new group can experiment
within bounds — trying out new approaches while still benefiting
from the resources and experience of the parent organization.
However, for completely new and disruptive technologies,
both physical and structural separation may be necessary, such
as a separate division that reports to senior management or even
an equity spin-out. When such a full degree of separation is not
warranted, it is still desirable to have separate funding and ac-
counting, so that losses from the new projects are not carried
by an established business unit. The new venture may also need
its own policies to match the realities of building a new business.
It must be able to attract the best personnel and have the latitude
to do fast prototyping and probe ill-defined markets, all while
keeping restrictive or slow controls and burdensome overhead to
a minimum.
Sub-Capability 2: External Shaping
In addition to internal redesign, transforming is also about rene-
gotiating the environment and shaping a company’s ecosystem.
This can be done through joint lobbying, creating new industry
standards, or by reshaping the firm’s business ecology. The latter
is an especially powerful transforming capability since it relies
extensively on external networks.
People inside the firm as well as outside are connected to nu-
merous networks. Consumers are connected through thousands
of social sites; companies are moving from supply chains to sup-
ply networks, and the focus of innovation is shifting outside the
firm to diverse open business ecologies. Advances in knowledge
sharing, coordination and pattern recognition technologies are
slowly but surely unbundling the vertical, silo organizational
structures of the past. External networking and co-creation,
however, require strong relational capabilities in order to fully
access the resources of many partners.
Loosely-coupled networks have long been used to create
supportive ecosystems for companies to enhance their com-
petitive position and strengthen their operational capabilities.
In addition, these external networks can also enhance the firm’s
ability to scan for, sense and adapt to early signals of threats and
opportunities beyond the boundaries of the firm. Your firm’s eco-
system can basically serve as a strategic radar system, using mul-
tiple touch points to pick up weak signals and thereby accelerate
the sensing process.
Exhibit A: DuPont’s Biofuel Initiative
The six dynamic sub-capabilities we have introduced vary in
their contribution to the process of adaptation, depending on the
situation. The challenge for leaders is to understand which capa-
bilities matter the most to them. To explore this question, we will
look at DuPont’s development of a risky green technology.
Green technologies represent fertile ground for exercis-
ing dynamic capabilities. Exploring alternative energy entails a
daunting level of uncertainty. There are significant capital risks
rotmanmagazine.ca / 71
 Dynamic capabilities refer to a capacity to purposefully
create, extend or modify your resource base.

to synthesize the compound. The project used organisms called

Relative Importance of Dynamic Capabilities methanotropes, which required large amounts of methane and a
fermenter to implement.
DuPont’s DuPont found a company in Norway that had already built
Biofuels Initiative a fermenter to handle methane generated as a by-product of oil
1. Sensing production and approached it to create an alliance. Combined
• Peripheral vision Low with DuPont’s own software, the Norwegian hardware allowed
• Vigilant learning Medium
the concept to be tested without massive investments and risk.
The testing resulted in the successful development of a new pro-
2. Seizing
• Probe-and-learn Low
cess that could cost-effectively produce PDO from corn starch
experimentation (Bio-PDO®). Shortly thereafter, DuPont successfully launched
• Deploying real options Very High Sorona®, the synthetic polymer used in soft floor covering, tex-
tiles and packaging.
3. Transforming DuPont quickly began to apply this newly-acquired base of
• Organizational redesign High technical competence in biotech to other endeavours. Given its
• External shaping High traditional use of energy as a major input as well as previous
ownership of Conoco, the company had a very thorough under-
FIGURE ONE
standing of trends in energy markets. Using peripheral vision,
DuPont spotted an opportunity to apply its new innovation to
the fuels sector.
The company not only saw that many governments were
beginning to respond to issues dealing with energy security and
to be absorbed and diverse stakeholders to be managed. DuPont climate change, but also understood that ethanol, the widely
faced this challenge in 2001 and 2002, when the firm launched produced alternative fuel source, was a ‘disadvantaged’ one: It
a biofuels initiative to leverage its overall biotech expertise and cost at least twice as much as gasoline to produce, had a signifi-
long-standing competency in commercializing science. cantly lower energy content per unit compared to gasoline, but
The company used a real-options approach to narrow almost could be distributed using the same infrastructure as gasoline
50 opportunities down to 12 strategic initiatives, including biofu- and diesel. DuPont started strategizing about how to enter this
els, biomaterials and biomedical businesses. For example, to de- new market.
velop biomass technologies, the company created a $40-million When asked, during an interview in 2007, how DuPont
joint project with the U.S. government; and to explore biomateri- made the leap from Sorona® to biofuels, then-Biofuels Vice Pres-
als, DuPont made more than a dozen investments in areas such ident and General Manager John Ranieri noted that decision-
as sustainable materials and energy, applied biosurfaces, and makers at the company could now ask the right questions — a key
therapeutics. component of vigilant learning. It was always obvious that etha-
nol had significant limitations and that there was great need in
SENSING. The crucial sensing period preceding DuPont’s bio- the fuel opportunity space, but only after developing their new
fuel initiative began a decade prior to its launch. Since the early core competency in biotechnology could researchers at DuPont
1990s, DuPont possessed the capabilities to make renewable ask, ‘Well, what biofuel would I like to make?’ That question was
polymers. However, the company could not do so profitably not a valid one before. As Ranieri phrased it, “That’s really the
due to the high costs of producing a key ingredient, Propanediol key to innovation. It’s not about always having the answers — it’s
(PDO), needed in its hydrocarbon-based chemical process. To about being able to ask the right questions.”
solve this problem, DuPont began experimenting with ways of While sensing this opportunity, DuPont displayed superior
producing PDO through biotechnology by using living organisms vigilant learning skills: The process of triangulating perspectives

72 / Rotman Management Winter 2018

 Dynamic Capabilities 2.0
Initial
Framework of SENSING
Teece & Colleagues:
Peripheral Vision
The Six New
Sub-Capabilities
Vigilant Learning
FIGURE TWO
on a complex issue is embedded in its culture. The company’s
corporate strategy can be summarized by the phrase ‘sustainable
growth’. The aim is to enhance shareholder value and contrib-
ute positively to society, while also decreasing its environmental
‘footprint’ along the value chains in which it operates. These are
three very different lenses through which DuPont looked to ana-
lyze its biofuel initiative.
SEIZING. To seize the newly-identified opportunity, DuPont first
probed and then invested its capital in a flexible manner. This
focus on adaptive experimentation and learning led it to explore
investment opportunities in many parts of the globe. The first
generation of biofuels that DuPont explored included corn etha-
nol and soybean diesel fuel. Eventually, it became clear that both
corn ethanol and soybean diesel fuel required very high land-use
and water resources. Thus, reductions in greenhouse gas emis-
sions achievable through their production were too low to make
these products worth exploring further. Instead, DuPont’s R&D
focus shifted toward second-generation biofuels, using microbes
and enzymes to convert non-food cellulose materials into sugars
that could be used to create biofuels.
Dynamic Capabilities
SEIZING TRANSFORMING
Probe & Learn Organizational
Redesign
Flexible Investing External Shaping
To do so, DuPont employed open innovation. The first facil-
ity to produce ethanol from non-food biomass was built through
a 50/50 joint venture with Danisco in Denmark, the world’s
largest industrial enzyme company (together with Novozymes).
To bring this production to commercial scale, a second joint
venture facility was completed in 2014, at an estimated capital
cost of $200 million. At this point, the focus narrowed to cel-
lulosic ethanol produced from corn stover, which is the readily
available biomass consisting of the stalks, leaves and cobs that
remains after the harvesting of industrial corn. This product was
not without risk: Through extensive work with auto and oil com-
panies, DuPont had come to understand its limitations. Due to
a vapour pressure that exceeds that of traditional gasoline, this
form of ethanol is incompatible with parts of the traditional fuel
infrastructure.
Even with these risks in mind, DuPont saw the innate poten-
tial of a higher value fuel that leveraged corn stover as feedstock
and used a genetically modified micro-organism to produce iso-
butanol. This led to a joint venture with BP called Butamax Ad-
vanced Biofuels, combining BP’s refining and distribution prow-
ess with DuPont’s proprietary biotechnology. This joint venture
rotmanmagazine.ca / 73
was able to address and resolve further technological challenges,
such as the inherently high toxicity of biobutanol.
After 1.5 million miles of vehicle testing, DuPont eventually
resolved the issue of compatibility with existing vehicles and
infrastructure. In early 2014, the joint venture submitted a 16
per cent butanol fuel to the Environmental Protection Agency
(EPA) for regulatory approval. The economics appeared attrac-
tive; one estimate assumed that biobutanol would be competi-
tive with oil at $70 - $80 per barrel. It remains to be seen wheth-
er oil at $50 a barrel will jeopardize the project.
The DuPont case demonstrates how crucial dynamic capa-
bilities are to the exploration of new businesses, especially those
in highly technical and uncertain markets. In this case, large
investment commitments are highly contingent on the concur-
rent development of an emerging technology. After a full decade
of R&D, DuPont’s time-to-market was more than seven years.
These patient investments were protected by a series of patents
issued in 2005, allowing for long-term, sustained investment.
Ultimately, the goal was achieved.
In hindsight, DuPont’s most important dynamic capabil-
ity was its commitment to learning from real options, allowing
critical opportunities to be explored through relatively small,
staged investments. By limiting investment exposure, DuPont
‘reserved its right’ to withdraw if certain technologies didn’t
bear fruit. More significantly, it could move ahead with the most
promising technologies without significant loss of time and lim-
ited up-front risk.
TRANSFORMING. Nearly as important strategically was DuPont’s
decision to redefine its research culture, create organizational
separation between the new ventures and the mothership, and
to actively engage with external partners with a common stake
in successful outcomes. Ranieri remarked that DuPont asks
teams to tackle the toughest problems first — the ones that really
prevent a product from getting to market. According to Ranieri,
many other firms that conduct scientific research do the oppo-
site — teaching their teams to solve the quick and easy problems
first, before tackling the big issues. This fundamental organiza-
tional shift in process helped DuPont avoid ‘rat holes’, ensuring
flexible and probing investments. Secondly, the foundation that
made DuPont’s biofuel initiative possible was laid with the origi-
nal creation of its Applied Biosciences business unit. This unit
was to function as its own separate platform with the agility and
74 / Rotman Management Winter 2018
flexibility to use resources and look for skills within the corpora-
tion that could aid in pursuing emerging market opportunities.
Lastly, the company developed partnerships with Fagen
Inc., a consortium of early adopters to support the rapid build out
of biobutanol production. The company also remained vigilant
about seeking and applying insights from the market. Through-
out its 17 years of exploration, DuPont remained highly alert to
the changing needs of automakers, regulators (including the
EPA), oil companies, legislators and agencies whose regulatory
decisions could influence demand.
The DuPont case suggests the following advice: When a
firm’s external environment changes drastically — such that new
business models need to be explored entailing significant invest-
ments in new IP amid high uncertainty — real options analysis
becomes a critical component of the firm’s seizing capability.
In closing
As indicated, dynamic capabilities are distinct from operational
capabilities, which pertain to the day-to-day operations of your
organization. By contrast, dynamic capabilities refer to a capac-
ity to purposefully create, extend or modify your resource base.
Clearly, such adaptation strategies cannot be reduced to an al-
gorithm. Organizations need to develop sufficient leadership
capacity to cover these capabilities. In the end, building dynamic
capabilities throughout your organization is a powerful way to
navigate stormy waters with fast-moving currents.
George S. Day is the Geoffrey T. Boisi
Professor Emeritus at the Wharton School
of the University of Pennsylvania. He has
consulted to General Electric, IBM, Unilever,
Coca-Cola, Boeing, Best Buy, Merck, Johnson
& Johnson and Medtronic. Paul J.H. Schoemaker is the founder and former
CEO and Chairman of Decision Strategies International, Inc. He served for
a decade as Research Director of the Mack Center for Technological Innova-
tion at Wharton. A longer version of this article, “Adapting to Fast-Changing
Markets and Technologies,” appeared in California Management Review
(SAGE Publications) and can be downloaded online.
f
 Reputation
Management
Goes Digital
Today’s companies need to take steps to proactively manage
their online reputation. Here’s how to get started.
by Anne Bowers and A. Rebecca Reuber
IN 2013, THE GENERAL MANAGER OF L’HÔTEL QUÉBEC filed a lawsuit
against a guest who had posted a review on TripAdvisor, stat-
ing that he had encountered bedbugs while staying there. The
hotel did not dispute that there were bedbugs, but argued that
the incident was a one-off and claimed $95,000 for reputation
damage and lost profits.
Concerned about the reputational damage caused by nega-
tive reviews, a group of hoteliers in the UK discussed bringing
legal action against TripAdvisor for what they regarded as un-
fair and incorrect reviews. Service providers often suspect that
such reviews have been written by rivals or disgruntled ex-em-
ployees. Indeed, an executive with the France-based hotel chain
Accor admitted to posting five-star reviews for Accor properties
and negative reviews about rival hotels.
The reputational stakes are enormous — and not just for ho-
tels. It has been said that ‘everyone’s a critic’, but this phrase has
assumed heightened meaning today as digital technologies make it
easy for people to publicly review every aspect of a company. From
‘best of ’ lists on magazine websites to employer reviews on Glass-
door, product reviews on Amazon, and service reviews on Yelp
and TripAdvisor, companies are continually being judged, and
those assessments are easily accessible to everyone, everywhere.
In this article, we will discuss two types of online reputa-
tional ratings — curated and uncurated — and describe the impact
they can have on organizations. We will also provide some guide-
lines for how managers can begin to use these ratings to their ad-
vantage.
Curated Reputational Ratings
Curated ratings are produced by a third party (often a media out-
let) that is considered neutral because it’s not involved in trans-
actions as either a buyer or a seller. Some are intended to rank
entire organizations against their peers. Fortune magazine, for
example, publishes an annual list of ‘The World’s Most Admired
Companies’ and ‘The 100 Best Companies to Work For’; News-
week lists the ‘Top Green Companies in the World’; and the Times
publishes annual ‘World University Rankings’. Other curated
ratings are intended to provide comparisons among products
or services. CNET, for example, provides reviews of technology
products; Wine Spectator publishes wine ratings; and Bloomberg
BusinessWeek ranks MBA programs.
Curated ratings are transparent in that they are based on
rotmanmagazine.ca / 77
 Online ratings can provide detailed information
about your rivals’ strategies.
pre-determined criteria: Companies know ahead of time how
they will be judged, and changes to the rating algorithm tend to
involve consultation and are widely circulated in advance. Data
collection is done uniformly across companies, with new ratings
appearing at set intervals, usually annually.
A high score on a curated rating is beneficial because of the
perception that a neutral third party has attested to a company’s
worthiness, and it can position a business publicly among the
very best in its industry. This can lead to the company becoming
more attractive to investors, customers, suppliers and employ-
ees, resulting in price, cost and selection benefits that persist over
time. Such a cycle of cumulating benefits can be described as one
in which ‘the rich get richer’.
On the other hand, curated ratings can be damaging when
a company compares unfavourably to its peers or to its own past
performance. Of course, to be compared, a company must first
make the list. The ‘World’s Best Banks’ list by Global Finance in-
cludes only the best bank from each country. In other words, the
very top is visible, but all other banks are not, so this list provides
little reputational threat. Thus, although it is advantageous to
be listed, it’s not necessarily damaging to be left off, because so
many banks in each country aren’t included.
However, if most of your peer organizations are rated or
ranked, there will be a reputational loss if you are left out. Not
surprisingly, relative placement in the ratings also matters. For
example, the World University Rankings by Times Higher Edu-
cation provides a ranked list of 800 universities. Differences in
scores are obvious, and even more potentially damaging, year-
to-year decreases are evident. The end result: Low or declining
scores can lead to the best students and professors choosing to
go elsewhere. In this case, ‘the poor get poorer’.
Uncurated Reputation Ratings
Uncurated ratings are posted by anonymous members of the
general public on digital platforms such as TripAdvisor, Yelp and
RateMyMD. The individuals posting the ratings are people who
use the platform to communicate the quality of their direct ex-
perience with an organization, so products and service encoun-
ters tend to be rated. An organization’s online reputation as de-
termined by its uncurated ratings is therefore determined by the
feedback of many people, rather than by a single curator.
Typically, the content of an uncurated reputation rating is
78 / Rotman Management Winter 2018
only partly structured. The structured portion tends to be numer-
ic (for example, a scale of one to five stars), and these numbers
are averaged across raters to provide an aggregate score. Because
the scores are continually updated, this type of reputation rat-
ing is always in flux. In the unstructured portion, the raters write
comments, which are rarely aggregated. Previous comments can
get pushed to the bottom of the list and become less visible as
new comments are added, sometimes leaving only the most re-
cent comments to garner the bulk of attention.
The calculations behind uncurated ratings tend not to be
disclosed, and changes are usually made without consultation
or transparency. Yelp, for example, takes into account the total
number of reviews received by an establishment, which review-
er provided a particular submission, and whether that review
has been voted as ‘helpful,’ but the company doesn’t reveal ex-
actly what formula it then uses. Given the different algorithms
and the lack of transparency, the impact of a one-star review (or
a five-star review) on an overall restaurant rating is likely to be
different across different platforms such as Yelp, TripAdvisor
and OpenTable.
Positive uncurated ratings are beneficial because people
tend to believe — and may be correct in believing — in the ‘wis-
dom of crowds’. In other words, better judgments are generally
formed with more people participating, and digital platforms
make the online ratings of hundreds and thousands of people
instantly available on mobile phones, so what once might have
been a difficult decision (for instance, choosing which new car to
purchase) with limited information and a long search time has
now become a much quicker choice supported by voluminous
data. This can, however, result in herd behaviour, with people
blindly following the decisions of earlier adopters. Indeed, evi-
dence suggests that the number of online ratings is as important a
reputation signal as their average score.
Although most uncurated ratings are actually quite positive,
they can be threatening to an organization when negative rat-
ings and reviews are visible. In particular, fraudulent reviews,
perhaps submitted by competitors, can be especially damag-
ing because there might not be any basis in reality to respond.
Because uncurated ratings are continually updated, an isolated
bad review will not be as persistently noticeable as it might be in
a curated platform, which generally changes only at pre-set in-
tervals. Over time (perhaps within days or even hours), isolated
negative feedback will be eclipsed by more recent reviews, and a
high volume of ratings is likely to smooth out extreme variations
that are not reflective of most people’s experience with a given
product or service.
Three Facts About Reputation Ratings
Positive ratings — both curated and uncurated — can help com-
panies gain and retain customers, partners, employees and sup-
pliers. In contrast, negative ratings can render developing and
maintaining such relationships more difficult or costly, with seri-
ous performance consequences. That said, although the link be-
tween rating outcomes and benefits might seem direct and obvi-
ous, there are a few nuances.
WHEN EVERYTHING IS POSITIVE, THE SEARCH SHIFTS TO DISTINGUISHING
AMONG THOSE RATINGS. In order to distinguish among many five-
star reviews, consumers actually have to read the reviews. Imag-
ine a restaurant receives a negative review. If it has many posi-
tive ratings, one negative review will not affect its overall level of
stars, but if people read the reviews to figure out the differences
among five-star ratings, they might see that negative feedback.
In fact, a negative review might be the first review they see.
Research on ordering effects suggests that the most visible,
first-read review has an inordinately large impact on individu-
al choice, particularly when the product being searched for is
relatively inexpensive — like a meal or a movie. For more costly
products, such a review may be only one of many that people
will read. Thus, it is not simply the rating itself, but also the order
of reviewer comments and the type of product or service that
matters.
ONCE THEY REACH THE TOP, RATINGS TEND TO DECLINE. When a com-
pany achieves a five-star rating, it starts to attract a wide variety
of customers who follow five-star ratings — regardless of what is
being rated. The problem is, these customers may not be a good
fit for the firm, and may be more likely to have unrealistic expec-
tations, which can translate into negative experiences and, thus,
negative reviews.
A recent study showed that award-winning authors saw their
ratings go down after winning important prizes, not because the
quality of the book had changed, but because winning the prize
brought in new readers who otherwise wouldn’t have read the
book. Those readers then rated it poorly because they were ‘bad
fits’ — not because of anything to do with the book’s quality.
RATINGS MATTER MUCH LESS TO REPEAT CUSTOMERS. New customers
may be apt to choose a particular firm based on its rating, but will
repeat customers continually check to see if that business retains
its five stars? Once customers gain experiences with a company,
those experiences are more likely to have a greater influence on
loyalty than are the ratings or reviews of strangers. An important
caveat, however, is that repeat customers do care about ongo-
ing ratings for status goods or services, such as luxury designer
brands or college degrees from elite universities.
Using Ratings as a Learning Tool
In addition to the above stakeholder effects, companies should
consider the following broader impacts of online reputation
ratings.
1. RATINGS PROVIDE VALUABLE INFORMATION ABOUT COMPETITORS
Most companies collect intelligence about their competitors, but
online reputation ratings can provide much more detailed infor-
mation about a larger set of rivals. Curated ratings are often cal-
culated on the basis of information supplied by each firm, which
might otherwise not be disclosed, especially for privately held
businesses. Because curated ratings stack companies up against
one another based on predetermined criteria, it’s obvious which
firms score better or worse than a particular company on, for ex-
ample, customer-satisfaction indicators or investment in facili-
ties. Although these generally are broad indicators without any
nuances, the numbers can nevertheless provide useful data for
an ongoing competitive analysis.
Uncurated ratings and reviews can also be useful. Customer
feedback could, for example, reveal new information about a
rival’s strengths and weaknesses. Or a company could discover
that the main threat to its business is coming not from its direct
competitors but from firms offering substitute products whose
existence is disclosed in online reviews.
2. RATINGS PROVIDE VALUABLE INFORMATION ABOUT CUSTOMERS
Although many consumers rely on ratings for making decisions,
the anecdotal experiences of friends and family are equally
powerful (if not more so). One study suggests that 83 per cent
of mothers and 74 per cent of fathers get information about
rotmanmagazine.ca / 79
 Many consumers rely on digital ratings for making decisions, but
the anecdotal experiences of friends and family are equally powerful.
products and services from social media sites such as Facebook
or Pinterest. The sharing people do over these networks —
including ideas, useful products and photos of product ‘fails’ —
influences how others feel about any particular business. Of
course, a company can never collect and analyze all of that in-
formation, but even if only a small fraction of these individuals
is using uncurated ratings to convey their beliefs, a firm can at
least obtain a sense of the overall word of mouth. This is true
for many curated ratings, as well. In fact, many curated raters
(such as Consumer Reports and Gartner) try to mimic the expe-
rience of users when testing products, and some forms of cu-
rated ratings (educational rankings, for instance) actually do
survey customers.
Uncurated reviews can provide important information that
is often not revealed in other ways, and in a timeframe that en-
ables a fast response. When Adobe released a comprehensive
update to its Lightroom product, for example, the software had
changed how users import pictures into the program. The goal
was to make the process more streamlined, but in an onslaught
of negative reviews, many people howled about the loss of par-
ticular features. As a result, Adobe reverted to the original pro-
cess in its next update and was able to provide current users with
a workaround. If the company had not seen the reviews, it might
have continued evolving Lightroom in a way that risked alien-
ating customers.
3. RATINGS CAN PROVIDE CONSUMER-TARGETING INSIGHTS
Online ratings and reviews can supplement internal data about
customers to aid in segmentation and targeting decisions. Are
the customers who are supplying reviews representative of a
company’s customer base? Are the customers who love a product
similar to those who hate it? Are the best reviews from customers
of a core service or from those using a new service-line exten-
sion? Answers to such questions can provide important strate-
gic insights. One Toronto-based painting company noticed that
it was receiving a significant number of estimate inquiries from
people who had read its reviews on a local rating site but that it
seldom landed any of those individuals as clients. The reason?
Those potential customers tended to be extremely price-con-
scious, and the company provided high-end, large-scale services.
Armed with this knowledge, the firm changed its vetting process
80 / Rotman Management Winter 2018
to avoid providing in-person estimates to those who were not
the proper fit.
4. NEGATIVE RATINGS CAN INCREASE TRUST AND AWARENESS
Generally speaking, having both positive and negative re-
views increases trust, because consumers feel that they are
getting a more accurate set of information. Thus, a firm that
strives to maintain a perfect five-star rating may in fact be un-
dermining itself. In addition, negative feedback can be valu-
able, because knowing what doesn’t work can be just as help-
ful as knowing what does, and research suggests that customer
satisfaction increases when quality exceeds expectations, no
matter what level of quality was expected. In other words, a
mix of negative and positive reviews helps to set appropriate
expectations.
5. RATINGS CAN BE INDUSTRY GAME CHANGERS
Research on both curated and uncurated ratings shows that both
can change the rules for success in an industry. This occurs when
the ratings become important to buyers and when organizations
respond by changing their behaviour to improve their ratings.
One important shift occurs when customers start making
decisions based on reputation ratings rather than on unmeasured
criteria. For example, if institutional investors decide to choose
only those firms with five-star corporate governance ratings,
publicly-traded firms will have to consider this new dimension
of competition. And when customers shift toward focusing on a
rating outcome (for example, a Michelin three-star restaurant)
rather than on other qualities (the presence of a renowned chef ),
the rating organization becomes an important third party in de-
termining winners and losers within that industry.
Eventually, organizations may start to make internal de-
cisions based on the expected impacts of those decisions on
the ratings. Research on the curated reputation rankings of law
schools, for example, shows that over time, they affect internal
job descriptions, admissions criteria, resource allocation, and
communications strategy. This is a fundamental shift from how
organizations made strategic decisions in the past, and over time,
the ratings criteria may become the most important factors for
competition in a market, regardless of whether industry partici-
pants believe them to be so.
How to Manage Reputation Ratings
Although managers now have less control over the ratings of
their organizations, they do have some discretion in managing
those rankings.
THE PROACTIVE APPROACH. Companies should implement an ex-
plicit policy with respect to managing reputation ratings. In doing
so, it’s important to recognize that the policies associated with
curated ratings should be different in nature from those for un-
curated ratings.
An organization can participate in multiple curated ratings
and rankings. A manufacturer could, for example, be ranked in
Fortune’s ‘100 Best Companies to Work For,’ be listed in News-
week’s ‘Greenest Companies,’ and have its products reviewed by
CNET and Amazon. Because of the sheer number of such cu-
rated ratings, managers need to determine which ones are the
most important. Often, competing ratings schemes are used, so
an organization might choose to participate in only those rating
schemes that highlight the things it does well.
For example, some business schools, including prominent
ones, have declined to participate in The Economist’s ranking
of MBA programs because they dispute the methodology used.
Even then, managers should still pay attention to all the schemes
for rankings the company participates in, because these schemes
could change in their power and influence over time. Indeed,
before Yelp, there was Chowhound, and before Chowhound,
there were newspapers. It’s also important for managers to keep
an eye out for up-and-coming curated ratings that could become
influential.
In contrast, managers have no say whether a particular
product or business is included in uncurated platforms. Repu-
tation indicators are always changing, so policies need to be in
place to ensure awareness of what is being said about an orga-
nization and to enable employees to handle the unexpected in
an improvisational manner. A study of British hotels reviewed
on TripAdvisor, for example, found that those reviews were
discussed at weekly staff meetings. Companies should also do
more than just monitor social media sites; they should also find
ways to capture customer feedback from those sources. Some
businesses accomplish this by training on-site staff to recognize
and diffuse situations that are likely to result in negative ratings.
Others survey customers in order to track problematic issues be-
fore the issues result in lower ratings.
THE REACTIVE APPROACH. This entails responding quickly to chang-
es in rank. Many stakeholders will know when a new curated rat-
ing comes out and will be aware of how particular organizations
are positioned in that rating. As such, managers need to be able
to communicate thoughtfully and fully about how their organi-
zation’s placement might have changed in comparison with its
rivals.
With respect to uncurated ratings, many customers who post
reviews, especially those containing negative feedback, expect a
quick response from management. A recent study of TripAdvi-
sor reviews indicates that after hotels start responding to nega-
tive feedback, they tend to receive a larger volume of positive
reviews, and negative reviews become less frequent. The authors
of that study argue that consumers are motivated to leave posi-
tive reviews when they see that a hotel appreciates the reviews
left by people in the past, and that they are less likely to leave in-
defensible negative reviews when they are aware that the hotel
scrutinizes such feedback.
In closing
Curated and uncurated ratings have become useful tools for con-
sumers in many markets, and the power of such information to
drive purchasing choices will continue to grow. As such, compa-
nies need to know how these rankings work, and develop explicit
policies to manage their reputation. As indicated herein, it is
possible to use online ratings to your advantage, rather than be
passively at their mercy.
Anne Bowers is an Associate Professor of
Strategic Management at the Rotman School
of Management. A. Rebecca Reuber is
a Professor of Strategic Management at the
Rotman School. This article has been adapted
from their chapter in Survive and Thrive: Winning Against Strategic Threats
to Your Business, which features the perspectives of the Rotman School’s
renowned Strategic Management faculty and is available at amazon.ca/.com
Rotman faculty research is ranked #3 globally by the Financial Times.
rotmanmagazine.ca / 81
 OF JUDGMENT
In an age of Big Data and Artificial Intelligence,
the exercise of good judgment by employees throughout
an organization has never been more important.
by Alessandro Di Fiore

HARDLY A DAY GOES BY WITHOUT the announcement of a promis-
ing new frontier for Artificial Intelligence (AI). From fintech to
edtech, what was once fantastically improbable is becoming a
commercial reality. At the same time, corporate investments in
Big Data and the dividends they yield in terms of consumer in-
sights are trumpeted on a daily basis.
Oddly, we don’t hear much about the demand created by
this rising ‘supply’: In a world of Big Data and AI, the demand
for sound and distributed judgment is increasing. ‘Qualitative
judgment’ — the ability to make a decision based on a personal
interpretation of the context and available facts — has never been
more important. In this article I will exlain why judgment has
become so important, and how to go about enabling it through-
out your organization.
The Rising Demand for Judgment
A basic decision process can be deconstructed into four logical
steps: collect and organize available data; analyze it for patterns
and insights; predict the best possible courses of action; and use
judgment to make a final decision. This last step is more impor-
tant than ever, and there are three main reasons for this.
1. Qualitative judgment is the last preserve of humanity in
making decisions.
There is no question that Big Data and AI offer important ad-
vances in the realm of management. Already, they are helping
organizations analyze their markets and consumers more effec-
tively and make informed predictions. But certain types of deci-
sions — particularly those around innovation and those relating
to consumers — will always entail a component of qualitative
judgment.
For example, in healthcare, AI is having a huge impact. But,
even if AI can support a doctor in making a diagnosis and sug-
gesting medical treatments for a particular cancer patient, only

rotmanmagazine.ca / 83
 It is not possible for a machine to factor in the emotional
and political context of any situation.
the doctor herself is able to factor in the overall condition (physi-
cal and mental) of the patient and his emotional context (and
that of his family) to decide whether to proceed with surgery or
chemotherapy. It is not possible for a machine to factor in the
emotional and political context of any situation; yet few would
argue that both contexts are critical for most decisions in busi-
ness — and elsewhere.
Some of the best management decisions in business history
have been made based on qualitative judgment rather than data
alone. Consider the story of Nespresso by Nestlè, which has be-
come the leading global brand of premium-portioned coffee. Ne-
spresso machines brew espresso from aluminium capsules — pre-
apportioned single-use containers of various high-quality coffees
and flavourings. Those familiar with the Nespresso story know
that the brand only took off when it stopped targeting workplaces
and started marketing itself to households.
Quantitative evidence had suggested that individual con-
sumers’ intentions to purchase did not meet the threshold re-
quirements set by Nestlè’s product-launch procedure. However,
Jean-Paul Gaillard, the young marketing head of Nespresso,
believed strongly in the idea, and thanks to his skillful interpreta-
tion of the data and his willingness to go against Nestlè’s previous
innovation ‘rules’, he convinced the company to take the risk. If
he had only listened to the data, the concept would never have
gotten off the ground.
Business history is full of similar stories, where people have
willfully complemented data with their qualitative judgment and
reaped great rewards. Creativity, emotional understanding and
pure imagination are things that humans excel at, and the avail-
ability of a huge amount of additional data will not change this
fact of life.
2. As the cost of prediction goes down, the demand for judg-
ment will increase.
In their November 2016 article for Harvard Business Review, “The
Simple Economics of Machine Intelligence”, [Rotman School of
Management Professors] Ajay Agrawal, Joshua Gans and Avi
Goldfarb framed the trade-offs between Artificial Intelligence
and judgment. I would like to elaborate on this brilliant article,
stressing the authors’ analogy to Production Theory — i.e., the
84 / Rotman Management Winter 2018
economic process of converting inputs into outputs.
As Prof. Agrawal et al. indicate in the article, technological
revolutions impact the cost and value of important input factors.
In our case, thanks to the advent of Big Data, the cost of finding
and organizing data and running analyses has become much
cheaper. As the authors indicate, AI is a prediction technology, so
the cost of prediction will also become cheaper over time.
When the cost of any input factor falls, certain microeco-
nomic rules can be applied — and not only to production, but also
to the decision making process. First, we will substitute other
input factors (human skills) with the low cost (and better) tech-
nology to collect data and develop predictions; and second, the
value and demand of complementary factors will rise.
For example, when data and prediction are cheap, compa-
nies can generate more frequent customer insights, which cre-
ates the need for more-frequent decisions regarding customer
support, promotions, product customization and new product
development. This, in turn, will lead to greater demand for the
application of judgment and emotional understanding — pro-
vided by humans — to make decisions. This is exactly what hap-
pened at Unilever, after it introduced a number of data-driven
systems accessible to all of its global marketers: The availability
of real-time, frequent, data-driven consumer insights generated
ever-greater demand for judgment and decisions by the compa-
ny’s marketers.
3. As data-prediction technologies are distributed more
widely, so must judgment be.
Big Data and AI will provide managers and employees at all
levels with accurate data and predictions at their fingertips. Us-
ing distributed IT architectures, these tools can allow employ-
ees throughout an organization to make the right decision for a
particular context in a timely manner. As a result, the smartest
companies will ensure the distribution of judgment-based deci-
sion powers.
Recognizing the power of data-based distributed decision
making, Affinity, the Minnesota-based credit union, issued a
framework to guide its employees in making decisions regard-
ing loans. Its ‘MOE’ system (Member, Organization, Employee)
operates like a ‘constitution’ to free up the judgment powers of
 When data and prediction are cheap, companies
can generate more customer insights, which creates
the need for more-frequent decisions.
employees and provide a ‘North star’ to guide them when ap-
plying these powers. Employees have full latitude with respect
to rates and can override the bank’s policies based on their judg-
ment of ‘what is right for the customer in that context’, supported
by customer analytics. The MOE Constitution states:
“No employee will ever get in trouble for doing what is
right for the customer. There is only one operating policy or
guideline you ever need: Trust your feelings. If it feels right
and makes sense, do it on behalf of the customer. Do not
consider the system capability, policy, or procedure; err on
the side of doing whatever is necessary for the customer and
allow your manager or supervisor to take care of the rest. Fi-
nally, be prepared to defend your decision! If your intention
is to do what is right for the customer, you will have the sup-
port of management and your co-workers.”
Every Affinity employee can now decide, on the spot, whether
to provide or not provide a loan to a particular customer, and
if so, at which rate, by using a blend of customer analytics and
personal judgment. When an employee deviates from the bank’s
policies, she is required to justify her decision and post the ra-
tionale in Affinity’s Touche system, which stores all data and
electronic records of members/clients for all to see, as well as
a full history of employee explanations for lending. The result:
When Affinity employees started to make judgement-based de-
cisions in large numbers, charge-off rates for higher-risk clients
dropped by almost 50 per cent — from 1.9 to 1 per cent.
Implications for Organizations
The three factors discussed above indicate that now, and in the
future, companies will require more rather than less human judg-
ment for their innovation- and customer-related decisions.
To get there, judgment must be democratized across the
organization. Most companies cannot rely on a lone individual
like Jean Paul Gaillard to override the existing culture and proce-
dures, and that is why every organization needs to create its own
Judgment Protocol. Much like Affinity’s MOE, this is a system
that legitimizes the exercising of judgment within your organiza-
tion across all levels — and one that will change the century-old
Analytics Will Only Get You So Far
Anyone who knows the story of Apple knows that it was built
on insights rather than analytics. Steve Jobs was actually
highly resistant to quantitative research. 
When Jobs returned to Apple in 1997, it was a mess. In
his absence, the emphasis had been on developing more and
more products. Apple was even selling printers in partner-
ship with Hewlett Packard — and making next-to-no money
on them. Resistant to quantitative research, Jobs used his
judgment to quickly cut the numbers of models and prod-
ucts. He then drew a simple two-by-two diagram and told his
colleagues that Apple needed to have one product in each
quadrant.
As indicated by the Apple story, the capability to gener-
ate and apply insights and qualitative judgments to innovation
is a key competitive advantage — or at least, it should be. The
trouble is, most companies remain tied to a numbers-above-
all-else approach and continue to invest heavily in developing
analytic skills. As a result, innovation processes have been
re-engineered — or over-engineered — with stage-gate pro-
cesses equipped with financial evaluation tools to support go/
no go decisions.
Strategy and innovation should not be a mere exercise of
analytical power, but instead, a qualitative process in which an
analysis of the available data from the past leads to insights
about the future, born out of individual observation and reflec-
tion — rather than the other way round.
The problem is, measurement is comforting. Companies,
mostly large ones, need to maintain some kind of control over
processes, and playing the management-by-numbers-game
makes decision makers feel more confident. Enraptured by the
Holy Grail of quantitative analysis, business leaders become
so obsessed by numbers that they rarely question their
guidance. Preoccupied with issues such as predictability and
control, they have become increasingly suspicious of qualita-
tive perceptions.
However comforting it might be to ‘stick with what you
can measure’, leadership isn’t about feeling comfortable:
It’s about seizing opportunities as they occur — even if the
numbers suggest otherwise. The analysis of data will always
be useful, no question. But judgment is the driving power
behind innovation.
- Alessandro Di Fiore
rotmanmagazine.ca / 85
 The Judgment Protocol
Judgment Democratization
• Provide space and freedom to use sound
judgment to make decisions
• Push down decision powers to the mass
of employees
• A few principles act as ‘guiding star’
DEMOCRATIZATION x EFFECTIVENESS
RISK
Lower Risk Perception
• Deception Control Model
• Transparency for social control
• Few principles as guiding star
FIGURE ONE
‘command and control’ philosophy that many companies still use
to make decisions.
Following are four guiding principles for leaders who are eager to
embrace this new imperative.
1. Democratize Judgment Power
Companies tend to believe that innovation and market-related
decisions are the responsibility of a few, highly-positioned people.
There is a widespread autocratic view, which conceives that only
the ‘elected ones’ are entitled to make decisions that affect cus-
tomers. By way of contrast, consider the credo that Toyota em-
braced in its Toyota Production System (TPS). In TPS, everybody
is responsible for the search and implementation of ideas to im-
prove operational performance. Responsibility is pushed down to
the very lowest level in the organization. In the TPS, two worlds —
manufacturing and market innovation, which appear so remote
from each other — share the same philosophy for success.
2. Foster Qualitative Judgment Skills
As soon as we push down the responsibility to identify issues
and make decisions, we will want to increase the probability that
our employees will chose the right course of action and execute
on it properly. The second core principle of the TPS is to train
everyone in the workforce in quality, lean/six sigma tools and
86 / Rotman Management Winter 2018
Judgment Effectiveness
• Standardize tools and methods to
generate innovation and market insights
• Train the mass on selected tools and
methods
• Democratization of data access to the
mass of employees
Customer-centricity
Faster and better decisions,
closer to the customer
Market adaptability and agility
techniques. Widespread training on standardized tools increases
the probability that people will come up with the right insight,
decision and execution to impact performance.
Other organizations should apply this same principle and
standardize tools, methods and techniques to improve their em-
ployees’ skills in generating insights — and applying judgment.
Doing so will require a shift in perspective, to a mindset that
views judgment as a key organizational capability worthy of
investment.
For example, Unilever encourages every one of its employ-
ees to engage with consumers to gain insights about their needs,
providing allotted time during the workday for this activity on a
regular basis. To raise the effectiveness of the time and freedom
provided, Unilever trains its employees in both consumer obser-
vation and probing methods, as well as on how to use some of
their newly developed Big Data marketing tools like the People
Data Centre, which combines social media and business analyt-
ics capturing conversations in 40 languages.
As an example of this approach in practice, consider the
Knorr brand’s ‘Love at First Taste’ campaign. Data suggested
that ‘people are attracted to others who like the same flavours as
they do’; Knorr marketers decided to act on this finding by set-
ting-up people with the same taste on blind tests and videotaping
the results. The video reached 100 million views in a few weeks:
Data plus insight and judgment spawned a marketing hit.
 Data access can raise the effectiveness
of employee judgment.

3. Provide Data Access to All Let’s return to Affinity as an example of a Post-Detection

Data access will raise the effectiveness of employees in using Model: When an employee decides to offer a loan to a custom-
their judgment. Of course, some companies are better than oth- er because it ‘feels right’ (per the MOE Constitution) but is an
ers at transforming data into actionable insights. Prior research exception to the bank’s policy, the employee must write up a ra-
has tended to emphasize the role of data scientists who have the tionale for the decision taken and post it on the client data sys-
skills to analyze data. This implies that companies with more data tem. As such, the rationale is transparent to colleagues and su-
scientists have better chances of generating value. My own expe- pervisors, generating a social control that reacts only in extreme
rience as a consultant, supported by academic research, indicates instances.
a different view: Firms that hire an army of data scientists do not
always generate better value. Rather, it is the process of data man- In closing
agement — and particularly, the democratization of access and The time has come to walk the talk with respect to democratizing
use of data among managers and employees — that creates tan- decision-making authority. Low cost data-prediction technolo-
gible value. gies, coupled with an official, company-specific judgment pro-
Consider internet platform companies, where data is at the tocol can help to free employees from the shackles of hierarchy
core of the business model. Airbnb has taken a step ahead in the and create truly agile and customer-centric organizations that
democratization of data: Its entire workforce, including human are able to adapt quickly to market signals. And, if the companies
resources, has access to its data science tools to make timely who have embraced this approach are any indication, profitable
decisions related to requests from both users and providers of growth is sure to follow.
homes, as well as act swiftly on innovation opportunities.
However, Airbnb also understands that fully-inclusive data
access is not enough: Its employees are also trained on how to use
data tools and extract insights to make informed decisions. Data
University is Airbnb’s attempt to make its entire workforce — not
just its engineers — more data literate. It has designed 101-level
copurses on data-informed decision making which are available
to all employees. The result: Since launching the program in late
2016, Airbnb has seen the weekly active users of its internal data
tools rise from 30 to 45 per cent.

4. Loosen the Reins of Control

Organizations tend to be uncomfortable at the prospect of de-
cision-making authority being pushed down the hierarchy. For
many, the loss of control is synonomous with risk, and this has
been a major barrier to the true empowerment of the workforce.
The solution lies in shifting from a traditional ‘Prevention-Con-
trol Model’ to a ‘Post-Detection Model’.
For example, in a bank, if an exception to a loan policy is
being requested, the Prevention-Control Model would require
authorization signatures several levels up. Even when a loan ap-
plicant has a a perfect credit score and fits with the bank’s policy, Alessandro Di Fiore is the Founder and CEO of the European
Centre for Strategic Innovation (ECSI) and ECSI Consult-
most likely the loan will need to be signed by the employee and ing, based in Boston and Milan. He is the founder and former
her supervisor before being approved. Prevention Control Mod- Chairman of Harvard Business Review Italia.
els are the greatest barrier to true empowerment.

rotmanmagazine.ca / 87
2OTH ANNUAL
ROTMAN LIFE-LONG LEARNING CONFERENCE

Nudging Innovation
In Your Organization
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2O18 | 8:3O AM - 4:3O PM

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Professor of Strategic
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COURTNEY FEIDER Management and Jeffrey JIM STENGEL Changed the World
Executive Coach, S. Skoll Chair in Adjunct Professor of DAVID ROBERTSON
Organizational Brand Technological Innovation Marketing, Anderson School MELISSA SCHILLING
Professor of Practice,
Strategist and Author and Entrepreneurship, of Management, UCLA; Wharton School of Herzog Family Professor of
Rotman School; Author Former Global Chief Business, UPenn; Author Management, Stern School
Marketing Officer, P&G; of Business, NYU; Author
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Idea Exchange

90 TIM BROWN on the evolution of Design Thinking

94 DAVID ROBERTSON on The Third Way to innovation

97 SARAH KAPLAN + JOSHUA GANS on ‘Structured Anticipation’

101 KATE SWEETMAN on the power of Reinvention

104 SPIKE LEE how the physical environment affects our thinking

108 SCOTT GALLOWAY who will be the first trillion-dollar company?

112 CHEN-BO ZHONG on information structure and creativity

116 ANGELA ZUTAVERN the Mathematical Corporation

120 NAVI RADJOU on Frugal Innovation

124 HEIDI FRANKEN on ethical innovation in Finance

128 HEATHER FRASER on the Design Thinking mindset

132 MIHNEA MOLDOVEANU on creative destruction in higher education

 QUESTIONS FOR Tim Brown, CEO, IDEO

Q
&A
You have said that, at its best, design creates relation-
ships between people and technologies. Please explain.
When I use the term ‘technologies’, I mean anything that is
constructed by human beings — whether it’s an iPod, an au-
tomobile, a rapid transit system, or an organization’s meth-
ods of communication. Herbert Simon said that whenever
we shape the world to meet our needs, we are designing. For
better or worse, we also shape nature to meet our needs. In
each case, by better understanding the needs of those you
are trying to serve — and expressing those needs in the form
of insights that you develop and prototype — you can end up
with new and powerful choices.
One of the world’s leading The issue is, we don’t always get to the shaping part as
design thinkers ponders early as I would like. Sometimes, we let a technology take its
own path for too long, before we realize that we can shape
the meaning of creative it to meet our needs — instead of being affected by it in a
leadership. passive way.

Interview by Karen Christensen
One of the key tenets of IDEO’s approach is studying
‘emergent behaviour’. How do you define that term?
In our practice, we are particularly interested in the behav-
iour of ‘extreme users’. If you take the bulk of behaviour
around whatever you are focusing on — whether it be com-
muting, shopping or some other activity — and draw a bell
curve, the extreme edges of that curve represent emergent
behaviour. These users often find ways to work around

90 / Rotman Management Winter 2018

 AI and machine learning are not just technologies: They are media
that we can design with to create user experiences.
the system and do things in a novel way. As a result, study-
ing their behaviour can be very useful in terms of informing
possibilities for the future. We’ve found that collectively,
‘behaviours on the edge’ often inform ideas that become
larger scale.
Roger Martin has said that on its own, data cannot help
us understand the future; it can only help us understand
the past. How do you react to that statement?
I don’t think for a moment that Roger is suggesting we ig-
nore data; I think he is saying that we need to do things
differently today. In the past, we often depended upon
data as a sort of ‘instruction set’ for the future. But in a
world where innovation is in high demand, as indicated,
we need to focus most on what is happening at the edges —
the ‘weak signals’ among a particular group of consumers.
That is the best way to inform your questions and imagine
the future — whether that be product innovations, new or-
ganizational approaches or future business models.
In a world where operational competitiveness is the
goal, and not innovation, you can still take an algorithm
and say, ‘This is what an optimally-efficient version of X
looks like’. But that approach only works in an environ-
ment that is relatively stable and predictable. In that
world, you can get away with using data from the past to
portend what to do in the future — because you are assum-
ing that the future will be no different from the past. This
is what a lot of companies have done. They live in a world
where it’s all about competing operationally, and hence,
their improvements are only incremental.
However, in the world of massive change that we live
in today, everyone must compete creatively. In this world-
view, clearly, data about the past cannot algorithmically
tell you what to do next. If the context of the future will
be different from the context of the present and the past,
then data about the future is obviously going to be differ-
ent from data for both the present and the past. Having
said that, data can still be extremely useful when it comes
to informing which questions you should be asking to lead
you to whatever your version of the future is.
In an unpredictable world that is as volatile as it’s ever
been, the best way to think about the future is to assemble
the things you do know about and then wonder what things
will be like in the future. Thankfully, one big piece of this
puzzle is fairly predictable, because human behaviour
doesn’t change very much.
In an increasingly digital world, what new skills are being
demanded of the design thinker?
Like everything else, the medium of design is evolving.
I was trained as an industrial designer, so my media was
metal, plastic and production lines; but I happened to get
trained just as the world was computerizing, so, my inter-
est back at design school was, ‘What is that experience
going to be like?’ I happened to fall into a company that
ultimately became IDEO, where one of the founders, Bill
Moggridge, had already coined the term ‘interaction de-
sign’. He realized that there was going to be a new medium
for design: The digital experience.
Suddenly, as designers, we found ourselves trying to
imagine how we could manipulate and work with this new
media. ‘The software experience’ entails all the things
that software does on screens or through other kinds of
user interactions. That journey has been going on for 30
years, now, and it is constantly evolving.
Today, we have other media that are now ‘design-
able’, including AI, data and machine learning. These are
not just technologies: They are media that we can design
with to create user experiences. If we think about a par-
ticular kind of data, and doing X or Y with it, we can create
a response that helps a user achieve whatever it is that she
wants to get done. That’s still what a designer does: It’s no
different from crafting something useful from a piece of
plastic or wood.
rotmanmagazine.ca / 91
 Collectively, ‘behaviours on the edge’ often inform ideas
that become larger scale.
Today, we’re seeing an explosion of technology com-
panies delivering digital experiences in one form or anoth-
er, and most of them recognize that their task is to shape
their technology to meet peoples’ needs. As a result, many
have built an in-house design capacity. I’ve seen this with
my own eyes: The number of designers in Silicon Valley has
gone from a few dozen when I first got here in the late ‘80s,
to tens of thousands today. Increasingly, people recognize
that Design Thinking generates momentum through itera-
tion and prototyping, and that it strengthens insight around
what works — and what doesn’t.
Another exciting area is Biology. We’re starting to see
early indications of new materials that can be built from
physical materials, like cells and DNA. That’s another new
medium for us to use. So, one big shift is that we need to em-
brace and learn how to design with all these new media.
In recent years, the complexity of the problems we’re
being asked to contribute to has gone up, by a few orders of
magnitude. We used to design products, which was com-
plex enough; but now, we are being asked to design services,
which are a succession of products, moments, touch points
and experiences; and we’re being asked to think about de-
signing systems, which are to some degree, constantly
evolving and made up of many services, products, ideas
and stakeholders. For instance, a few years ago we started
working with Innova Schools to design a new school sys-
tem from the ground up, for the emerging Peruvian middle
class. We had to come at the problem from many different
perspectives at once, with a highly interdisciplinary team.
We’ve been iterating on the design of that system for several
years, and it is now beginning to be successful, with tens of
thousands of students, and some really fantastic outcomes.
The final thing that’s new is that the context for design
has significantly changed. When I first started out, I was cer-
tainly conscious of things like the environment — that was
one of the things that got me thinking about design think-
ing in the first place. But at the time, there was no notion of
92 / Rotman Management Winter 2018
things like the ‘circular economy’ and the kinds of design
challenges that climate change presents to us — and the
opportunities. That context has changed significantly — as
it has for business leaders. Designers and business leaders
alike have to be much more aware of the societal context,
and their contribution to it, than in the past.
All in all, it’s much harder to be a designer these days,
but on the bright side, designers can have a tremendous im-
pact on the resulting system. If you get it wrong and design
something with too many steps or too much packaging, you
will have a negative impact. But, if you get it right and do
some clever things, you can have a very positive impact on
the world.
You have said that “Design is never finished.” But, obvi-
ously, things have to be launched into the world; what’s
the best way to manage this paradox?
Back in the day, Ford would launch a new car, and then it
would come back the next year and relaunch it with minor
tweaks. The Thunderbird, for instance, went through many
iterations, but it was still a Thunderbird. In that sense, de-
sign has always been something that is ‘never done’— but
it used to be much more manageable, because companies
had traditional top-down systems in place to manage those
activities over a set period of time. The difference today is
that most things are delivered through software, which can
change constantly — particularly if it’s informed through
data that is collected in real time to improve the user experi-
ence. Amazon is a tremendous example of an organization
that embeds that idea into everything it does. But even in
this case, design is never done, because you’re learning more
and more about the effectiveness of what you have created.
As a result, today, you have to think about what you
create as a ‘learning system’. It can’t be something where
researchers or designers come back every so often and look
at ‘how well they did’; that can be part of it, but increas-
ingly, the learning has to be ongoing and constant. If you’re
not thinking that way, you’re failing to make use of the most
powerful part of technology: That it enables us to continu-
ally make things better.
One of the breakthroughs we’re already seeing is the
role of AI, and how this technology can constantly respond
— based on the data it’s getting — and basically ‘rede-
sign itself ’. There are already examples of that in modern
machine-based systems like car engines, which collect all
kinds of data as you’re driving, adjusting the way the car
reacts and operates. These are systems that are constantly
informing themselves — and pretty soon, everything is go-
ing to be like that.
collective for additional expertise when needed (and vice
versa). Basically, we wanted to focus our efforts beyond our
everyday innovation business, and we saw an opportunity
to get involved in emerging areas like Artificial intelligence,
Genomics, Robotics and Data Science.
As I said earlier, design is no longer about innovating in
terms of products and solving small problems. We will leave
it to the IBMs, GEs and SAPs of the world figure out how
to apply design thinking to their corporate structure. For us,
going forward, it’s about tackling more systemic issues.

How do you define ‘creative leadership’?

Creative leadership isn’t about you, as a leader, becoming
more creative. It’s about leading for creativity, which means
it is your job to unlock the creative potential of your organi-
zation by setting the conditions for people to generate, em-
brace and execute on new ideas. Another piece of it is, in an
unpredictable marketplace, every organization needs to be
exposed to disruptive forces. I think of it in biological terms:
Any ecosystem that is exposed to a disruptive force will ei-
ther die or adapt. Organizations with cultures that embrace
emergence are more likely to respond to those disruptions
and adapt. It’s a leader’s job to create such a culture.

On that note, IDEO recently joined a creative collective—

and sold a part of its business—catching many people by
surprise. Was this a (proactively) disruptive act?
At IDEO, we aren’t interested in hyper growth; we’re inter-
ested in impact. That is why we joined Kyu and sold a minor-
ity stake of the business to them. Kyu is part of Hakuhodo
DY Holdings, one of Japan’s largest advertising holding
companies. Other members of the collective are Red Peak,
SyPartners, Sid Lee, Digital Kitchen and C2 Internation-
al. We will remain an independent entity and continue tak-
ing on our own clients — but we can now tap others in the
Tim Brown is the CEO and President of IDEO, and the author of Change
by Design: How Design Thinking Transforms Organizations and Inspires
Innovation (HarperBusiness, 2009). He advises senior executives and
boards of global Fortune 100 companies, chairs the World Economic
Forum’s Global Agenda Council on the Creative Economy, and serves on
the Mayo Clinic Innovation Advisory Council and the Advisory Council
of Acumen, a non-profit global venture focused on improving the lives of
the poor. His TED Talks, Serious Play and Change by Design, are avail-
able at TED.com.

rotmanmagazine.ca / 93
 QUESTIONS FOR David Robertson, Innovation Expert, The Wharton School

Q There are two widely-recognized routes to innovation:

incremental improvement and revolutionary disruption.
Describe what you call ‘The Third Way’.
These two traditional types of innovation are still really

&A
important: We should always be thinking about how to im-
prove our products and services for current customers; and
we should also be thinking about the big disruptive forces in
our industry and society, and how to embrace them. But in-
novation leaders need a more complete tool box than just a
hammer and a screwdriver.
As I looked around, I noticed some companies doing
things that didn’t fall neatly under either incremental or rad-
ical innovation. This was a different approach, whereby you
surround your product with complementary innovations
that make the core product even more valuable. If your core
product is no longer new and your company is simply satisfy-
ing the same need it has satisfied for many years, you should
consider this approach.

You have studied how Gatorade adopted this route. De-

scribe its ‘third-way journey’.
A Wharton School Gatorade actually invested in disruptive innovation by de-
veloping a new chemical that would help people process
innovation expert oxygen more efficiently. If it had worked, it would have
describes a Third changed the future of sports hydration. The problem was,
the chemical was only available from one Brazilian forest.
Way to innovation It turned the drink a very toxic looking yellow colour, and
that opens news doors to growth. you had to drink about a keg of it to get any benefit. So, this
attempt at disruption failed.
Interview by Karen Christensen The company had also tried incremental innovation, by
spinning out interesting new flavours. But that didn’t work
either, because every time they added a flavour, they were
adding cost, but not increasing sales.
Sarah Robb O’Hagen took over the struggling brand in
2008, in the midst of the recession — at a time when people

94 / Rotman Management Winter 2018

 We need to be humble about our ability to predict when
an innovation is going to work and when it’s not.
were substituting Gatorade for the cheaper Powerade brand
or plain water. Under O’Hagen, they tried the Third Way:
They took a close look at what serious athletes care the most
about, and the answer was, their performance. They real-
ized that they could help these athletes out before, during
and after the sporting activity — not just during it. So, they
came up with the G Series of energy chews, sports bars and
protein shakes. That’s when people really came back to the
brand and sales of the core drink increased.
Of course, there was nothing especially innovative
about sports bars or protein shakes. The key was that they
tied these into a total package, making them part of a larg-
er portfolio. When you do this, you can enter the realm of
‘higher purpose’, because together, your products contain
a promise to the user. Each element has a dual purpose:
To be good on its own, and also to help support the overall
portfolio.
The promise to the user is a key element in the Third Way.
What makes for a compelling promise?
I deliberately don’t use the term ‘brand’, because that is
a broader term. The promise has to be consistent with the
brand, but it is a tighter thing: It’s more about focusing on
what your customers are trying to accomplish with your
product. GoPro wants to help you capture your greatest ad-
ventures; and Gatorade wants to help you perform better
as an athlete.
The Third Way is not the right response in every setting.
When does it work best?
One thing we’ve learned is that we need to be humble about
our ability to predict when an innovation is going to work
and when it’s not. We should always be trying to make
our current products better and recognize if there’s a new
disruptive technology out there, and we should always be
looking at new markets. But, in addition to these things, we
need to be asking, ‘Are there things that we could be do-
ing around our product?’ In most cases, people don’t think
about that.
Steve Jobs is viewed by many as a disruptive innovator;
but you disagree. Please explain.
He was definitely disruptive, but he wasn’t looking to dis-
rupt. In 2001, when he brought out iTunes and the iPod,
his goal wasn’t to change the music industry: It was to sell
more Mac computers. What he wanted to do was to ‘help
people manage their digital lives’ — that was how he phrased
it. At the Macworld conference in 2001, he came out with a
diagram that showed the Mac computer surrounded by all
kinds of digital devices: CD players, VHS movie players, vid-
eo cameras and palm pilots. He told the crowd, ‘Your lives
are becoming more digital, and we’re going to help you with
that, starting with music.’
In the Walter Isaacson book, he talks about how Jobs
resisted taking iTunes to the IBM platform. That is not the
action of someone who wants to transform the music indus-
try. That is the action of somebody who wants to sell more
Macs by making them more valuable. Even though custom-
ers were demanding that he bring iTunes over to the IBM
platform, he resisted, because it wasn’t about disruption. It
was about complementing his core product.
Describe how LEGO overcame a classic case of ‘binary
thinking’ about innovation.
LEGO had the luxury of a crisis. Like Gatorade, it had tried
to focus on the two classic types of innovation, and almost
went bankrupt in the process. For most of its history, LEGO
was quite comfortable just putting out a better box of bricks.
That worked — until it didn’t. Then it tried to do some really
radical innovation, moving away from bricks. It produced a
stream of diverse new products, including electronic toys
for toddlers, a virtual brick-building simulation and lines
of toys around two blockbuster movie franchises, Star Wars
and Harry Potter. The latter did very well while these movies
were in wide release, but sales nosedived once they were no
longer in theatres.
LEGO had long been associated with a few central
products, and when it moved away from them, custom-
ers had no reason to do business with the company. Close
to bankruptcy, it had no choice but to try something else,
and it hit upon The Third Way: Bionicle was a set of plas-
tic pieces that required assembly to construct an action fig-
ure. This was a new type of construction toy for LEGO, and
these boxes of plastic pieces were surrounded with com-
plementary innovations: comics, books, a video game and
more. None of these related innovations would have suc-
ceeded alone, but each made Bionicle even more appealing
to its target audience. This was literally ‘the toy that saved
rotmanmagazine.ca / 95
 Cheap, knowledge-generating, low-risk experiments
are the best way to get really good feedback.

The Third Way

1. A set of complementary innovations around a core

product that make the product more appealing or
valuable.

2. The complementary innovations operate together

and with the key product as a system to carry out
a single strategy or purpose — what we call the
promise to the user.
3. The complementary innovations — even those deliv-
ered by outside partners — are closely and centrally
managed by the owner of the key product.
LEGO’: It sold 190 million units over the toy’s nine-year life
span and was ‘rebooted’ in 2015.
I would advise companies that don’t have the luxury of
a crisis to go to their customers to find the crisis. Go out and
spend some time trying to understand not just what your
customers think of your product, but what they are trying
to achieve. What are their frustrations? What are their chal-
lenges? And, based on that, see if you can’t do more for them
beyond what your current product offers.
Learning from customers requires an intimate under-
standing of the human context in which a product is
used. What is the best way to achieve that?
There are different ways to look at the context around your
product, and I would urge innovators to try a number of ap-
proaches. I love the Jobs-to-be-Done framework from An-
thony Ulwick; and I also really like the Consumption Chain
mapping that Rita Gunther McGrath and Ian MacMillan
created. That’s a wonderful framework for looking at things
from a very different perspective — looking not so much at
the activities around a customer using the product, but rath-
er, the activities around the purchase process, which is dif-
ferent from the Jobs-to-be-Done framework.
who ran the incubator at Intuit, came up with the analogy of
the hippo: These animals are the most dangerous in Africa,
because they’re so territorial, they run very fast and their
bite is very strong. As a result, they kill more people than any
other mammal in Africa. But Molotsi pointed out that ‘hippo’
is also an acronym for ‘highest-paid person’s opinion’. When
people are trying to decide whether or not to proceed with an
innovation program, they look around the room and every-
body looks at the highest-paid person to get their opinion.
The key is to convince hippos that they are dangerous.
If you are that hippo, you’ve got to have the strength and
humility to say, ‘I really don’t know. Let’s go and ask our
customers’. Cheap, knowledge-generating, low-risk experi-
ments are often the best way to get really good feedback,
and are often the best predictor of whether something is go-
ing to be successful or not.
I advise people to start by visiting their long-standing
customers and watch their products in use. How do people
derive value from your products? What problems or frus-
trations do they face? By visiting customers, you just might
discover a more compelling promise — as well as comple-
mentary innovations that could help you deliver on that
promise.

You have said that the Third Way requires a high degree
of humility on the part of practitioners. How so?
The more research we do, the more we find that predicting
innovating successfully is really difficult. Hugh Molotsi,
David Robertson is a Professor of Practice and teaches Innovation and
Product Development at The Wharton School of the University of Penn-
sylvania. He is the author of The Power of Little Ideas: A Low-Risk, High-
Reward Approach to Innovation (Harvard Business Review Press, 2017).

96 / Rotman Management Winter 2018

FACULTY FOCUS Sarah Kaplan + Joshua Gans, Profs. of Strategic Management, Rotman School of Management
Structured
Anticipation:
How to Anticipate
Strategic Threats
to Survival
“AND THE WINNER IS…” said Warren Beatty
as he handed the envelope to Faye Du-
naway, “La La Land!” It was a moment
that would define the Academy Awards
ceremony in 2017, because the winner
of the Best Picture award was not La La
Land, but the breakthrough movie Moon-
light. Instead of celebrating the achieve-
ment of an African American-centred
film about discrimination along multiple
dimensions, the Oscars had become
a farce.
The scene was like a nightmare sequence, specifically
for one firm: PricewaterhouseCoopers. For decades, its
accountants had been charged with keeping the list of Os-
car winners safe and secret, to be revealed at precisely the
right moment. Every year, the two accountants given this
important task were shown on television, purposely nerdy,
purposely boring. Their job was to remain boring. The
things that kept them up at night all involved getting too
much attention.
When it was discovered that Beatty had the wrong en-
velope (somehow for Best Actress rather than Best Picture)
thoughts of who was at fault immediately turned to PwC.
This nightmare was real. The two accountants would never
attend another ceremony. And PwC’s careful branding was
in tatters.
To be sure, nightmarish though this was, it was not of
existential consequence. The accountants involved lost their
dignity, but not their jobs. PwC would, at worst, lose the
Academy as a customer. This was nothing compared to the
destruction that had befallen Arthur Andersen more than
a decade and a half earlier. Its errors led to the complete fail-
ure of the 90-year-old company.
rotmanmagazine.ca / 97
 In 2001, Arthur Andersen was one of the big leading
accounting firms. Those firms had an overwhelming share
of the main corporate giants. In Andersen’s case, that in-
cluded one of the top-ten most valued companies in the U.S.:
Enron. Enron was an energy trading and finance company
that had grown off the backs of energy deregulation in the
1980s and 90s. It had a ‘go for broke’ attitude that made
it the darling of many a popular management guru. But as
it turned out, its financial foundations were weak. When
these were exposed, Enron promptly failed.
But as with the Academy Awards, attention turned
quickly to the designated caretakers — in this case, the au-
ditors: Arthur Andersen. Overnight, other corporations lost
confidence in the accounting company, employees in the
thousands left to other accounting firms, and before any
investigation was completed, Arthur Andersen was effec-
tively no more: 85,000 employees and almost $10 billion in
annual revenue went elsewhere. This was more than just a
bankruptcy; there was simply nothing left.
It turned out that Andersen had left behind some years
before the meticulous practices that had made it what it was.
In other words, the failure was a symptom of a slow-moving
and then long-standing problem. That problem, as it turned,
out threatened its existence. So, unlike with PwC, the night-
mare for Andersen was not one of embarrassment and the
loss of a single client — it went to the core of the firm itself.
This example represents an existential threat to a busi-
ness, and it is such potential crises that keep corporate lead-
ers awake at night. The problem with these threats is that
they can now come from every direction.
Some actually come as a result of success. In the very
week of PwC’s Oscars debacle, Amazon faced a crisis of
equal proportion and far greater consequence. Aside from
its highly successful online retail business, one of Amazon’s
most profitable divisions is the largest provider of Cloud-
98 / Rotman Management Winter 2018
computing hosting services in the world. Amazon Web Ser-
vices (AWS) powers not only myriad small start-ups, but also
many larger firms, from media outlets to Netflix to Google.
It is everywhere.
On the morning of February 28, 2017, Amazon’s Simple
Storage Service (S3) team was engaged in routine debugging
to fix a problem with its billing system. What was supposed
to be a command to remove a small number of problematic
servers had a typo in it that instead led to a large number of
servers being removed — which then caused a cascade. Vir-
tually the entire system went down. It was out for most of the
day; and with it, the Internet around the world shut down, as
businesses were unable to access stored data.
The system was eventually restored, and Amazon prom-
ised to make changes so that such an event would never oc-
cur again, but this reminded the world of its dependence on
Amazon. While Amazon surely reaps some benefits — such
as efficiency and competitiveness — from economies of
scale, this incident may cause customers to diversify away
from it. In this case, Amazon did not face the loss of confi-
dence that Arthur Andersen did, but the event did put the
company on notice. What was supposed to be an unexciting,
if lucrative, part of Amazon’s business became far less so.
The very same week, a problem of gender discrimina-
tion was revealed at Uber. The crisis — at least publicly —
was triggered when an engineer, Susan Fowler, penned
a blog post describing discrimination and harassment
throughout the year she worked for Uber — including a
threat of dismissal when she reported these issues to Uber’s
HR department. For the record, such a dismissal would
have been illegal. The blog post revealed not just a cul-
tural problem within Uber, but a formal structure that was
aligned to perpetuate that problem. This led to a new round
of consumer boycotts to “#DeleteUber,” as well as major
legal issues and investigations.
 Examples of companies failing to anticipate
strategic threats abound.
Uber’s strategic threats were literally baked into the or-
ganization. This was not a problem that could be fixed over-
night. But for managers everywhere, the story should be a
warning: If you have to wait until a crisis becomes public,
it is too late; you have lost the ability to manage change on
your own terms.
Examples of companies failing to anticipate strate-
gic threats abound. Following are a few others that are
described in detail in Survive and Thrive: Winning Against
Strategic Threats to Your Business — a recently published col-
lection of perspectives from our colleagues in the Strategy
Area at the Rotman School of Management.
• Despite detailed safety systems, BP’s Deepwater Horizon
well exploded, leading to the worst corporate environmen-
tal disaster in history and a $50 billion clean-up bill.
• Escalating healthcare expenses for current and former
employees eventually contributed to bankrupting GM, as
costs per car reached more than $1400.
• Walmart spent millions and suffered major reputational
damage in the face of a 1.6-million-person class-action
lawsuit filed for gender discrimination across the United
States.
• Disruptive innovations drove Blockbuster, Nokia,
Kodak, and even the mighty Encyclopaedia Britannica
out of business.
• The U.S. nuclear industry faded to unimportance, with not
a single plant breaking ground in the U.S. between 1977
and 2013, in part because of too-early lock-in on an inferior
technology.
• Eli Lilly’s performance declined sharply because of over-
investment in one growth model, even when that model
had become counter-productive.
We believe that the inability of companies to anticipate
and respond adequately to such threats comes from four
common organizational mistakes.
• MISTAKE 1: FAILING TO APPRECIATE INTERACTIONS WITHIN SYS-
TEMS. Managers often appreciate only the superficial re-
lationships between actors or events, without examining
how interactions might compound problems in unexpect-
ed ways.
• MISTAKE 2: GETTING STUCK IN EXISTING WAYS OF DOING BUSINESS.
Companies become successful by honing their strategies
and operations. In times of crisis, they are often tempted
to double down on these practices rather than seek out
new responses, new growth models or new methods.
• MISTAKE 3: FALLING VICTIM TO COGNITIVE BIASES. Despite the
growing awareness that managerial judgment is shaped
by all sorts of biases, it is still exceedingly hard for man-
agers to break out of these traps. Unconscious biases can
lead companies into crises and make it exceedingly hard
for them to respond when trouble hits.
• MISTAKE 4: GETTING DERAILED BY SHORT-TERM INCENTIVES.
Economic incentives to act — particularly those driven by
customer needs or demands — may blind organizations to
risks that may arise.
The good news is that despite the acuity of these kinds
of threats, companies can survive and thrive. The key is
to develop what we call ‘structured anticipation’: that is,
understanding the risks and then building capabilities
to ensure that when threats materialize, quick action is
possible.
Although crises may be far from pleasant, they do not
have to create existential threats. In the face of the orga-
nizational mistakes identified above, two actions and two
cautions can form an approach to Structured Anticipation.
rotmanmagazine.ca / 99
 Diversity of thought can be supported by safe spaces
to bring up controversial ideas or information.

• ACTION 1: DEVELOP STRUCTURED PRACTICES FOR ANTICIPATION. In closing

Risk reviews, after-action reviews, anomaly-reporting sys- Across industries, today’s organizations face a variety of
tems, and the like can make the identification of potential strategic threats, and the potential for crises to emerge at
risks more feasible. Without these structured practices in any time — from anywhere — keeps many leaders awake
place, key information signals from the organization and at night. In this excerpt from the introduction to our new
the market will be lost. book, we introduce the concept of Structured Anticipation
and share some principles and practices for navigating an
• ACTION 2: CREATE A CULTURE THAT ENCOURAGES DISSENT. Sys- increasingly uncertain and complex environment.
tems don’t operate effectively without a supporting cul-
ture. A crucial way to anticipate risk is to look for anoma-
lies and to avoid discounting information and criticisms
that don’t fit with the organization’s existing ways of doing
business. Diversity of thought can be supported by diver-
sity in teams and by safe spaces to bring up controversial
ideas or information.

• CAUTION 1: BEWARE OF RISK COMPENSATION. Just as with in-

creased safety features in cars, the temptation that comes
with increased anticipatory practices is to take even more
risks once the practices are in place. The goal of structured
anticipation is not to encourage potentially-foolish risks,
but to anticipate internal and external threats while pursu-
ing strong organizational performance.
• CAUTION 2: DON’T LOOK FOR THE EASY WAY OUT. Some compa-
nies want to buy their way out of problems. Others want to
just do something that fits with their existing way of doing
things. More likely, the action necessary to fix the problem
will ‘leapfrog’ today’s practices and require radical organi-
zational change.
Sarah Kaplan is Director of the Institute for Gender and the Economy,
Distinguished Professor of Gender and the Economy and Professor of
Strategic Management at the Rotman School of Management. Joshua
Gans is the Jeffrey S. Skoll Chair of Technical Innovation and Entrepre-
neurship, Professor of Strategic Management and Area Coordinator
for Strategic Management at the Rotman School.
This article has been adapted from their introduction to Survive and
Thrive: Winning Against Strategic Threats to Your Business — a collection
of perspectives from the Rotman School’s world-renowned Strategic
Management faculty, published in September 2017.
Rotman faculty research is ranked #3 globally by the Financial Times.

100 / Rotman Management Winter 2018

QUESTIONS FOR Kate Sweetman, MIT Centre for Entrepreneurship

What does it mean for a business to exist in the age of

Uber?
In essence, it means that change can come from anywhere,

Q
that it is often technology-driven, and that it often necessi-
tates a new business model. This is what we are seeing, over
and over again. The good news is, because change can come
from anywhere, it can also come from you — from your col-
leagues, your organization or your network. As a result, each
of us can ‘own’ this age of disruption — as much as anyone
who tries to disrupt us.

You have said that a version of Moore’s Law will soon ap-
ply to the speed of change in the global business environ-
ment. Please explain.
For those who don’t know, Gordon Moore was one of the

&A
original founders of Intel. In 1965, he predicted that going
forward, the number of transistors per square inch on an
integrated circuit — i.e. a microchip — would double every
year. His prediction has held true, and this fact — and the
technology enabled by it — is what is driving much of the
disruptive activity we see today.

You believe there are ‘three degrees of change’ that ev-

An author and change
agent asks: Instead of
focusing on surviving
disruption, why not
consider reinvention?
Interview by Karen Christensen
ery individual and organization can engage in when striv-
ing to improve performance. Please describe them.
The three degrees are increasingly powerful in terms of the
outcomes they enable. The first is continuous improvement:
Consistently upgrading your abilities to get results. The sec-
ond is renovation — performing a refresh in order to make
a meaningful leap in performance. And the third and most
powerful is reinvention. This entails totally rethinking your
business model and your ability to compete.
On an individual level, reinvention entails core changes
to your mindset, skill set and behavioural set, which collec-
tively lead to a new ‘personal brand’. It might even mean
rethinking your career path and occupation. For organiza-
tions, reinvention comes with a strong need to rethink the
entire business: Everything from strategy and processes
to people, culture, product portfolio and brand image is
on the table. Of course, organizations can’t change unless
people change; and people can’t change unless organiza-
tions change.

What sort of mindset is required to truly embrace rein-

vention?
Last year, I was about to give a talk in Toronto, when a young

rotmanmagazine.ca / 101
 Modern change entails an exponential learning curve
for each and every one of us.
The Six Deadly Blindfolds
1. Arrogance: An overbearing display of superiority,
self-importance and false pride.
2. Negative feedback not acknowledged here: The
inability to hear anything negative about a project,
the company, or yourself; the inability to confront
brutal facts because it might get in the way of your
agenda, deadlines and reputation.
3. Dismissing competitors’ successes: Refusing to
accept a competitor’s success as valid and down-
playing a competitor’s strategy and product innova-
tions, usually because of your own past success.
4. We know what’s best for the customer: An
inability to have empathy for customer frustrations
and needs, and a lack of inquisitiveness to find out
ways to better align to customers’ current and future
desires.
5. Believing problems don’t exist: Being either
completely blind to organizational and individual
problems or dismissing them to protect oneself and
the company.
6. Avoiding the unavoidable: Seeing the writing on
the wall, but assuming it will go away in miraculous
ways, and life and business will eventually ‘return to
normal’ with no change required on our part.
woman came up to me and said, “I want you to know: I love
change. I can’t wait for change to happen.” And I said, “Wow.
That is so unusual!” I gave my talk, and then she came up to
the microphone afterwards and said — this time to the en-
tire audience: “I totally embrace change and I can’t wait for
change to happen.” I said, “Great; what is your question?”
And she said, “My question is, how can I make sure that it
doesn’t affect my day?”
Of course, my answer was, That is not possible! Change
is going to affect many aspects of your day: What you do,
who you interact with, how you get rewarded, what you
need to learn. People still need to have certain expertise and
skills, but they also need to accept that they have to learn all
102 / Rotman Management Winter 2018
sorts of new stuff. That mindset shift is the only way to sur-
vive, thrive — and maybe even enjoy the process. Modern
change entails an exponential learning curve for each and
every one of us.
What is an example of an industry or company where
reinvention is direly needed?
One example is the food industry, which is at a critical tip-
ping point. More and more shoppers are seeking fresh, or-
ganic choices, and this is costing packaged-food companies
serious market share. The top 25 U.S. food and beverage
companies have lost more than $18 billion in value since
2009. The question is, can industry leaders reinvent fast
enough to turn things around?
To make an analogy, these companies are a bit like melt-
ing icebergs; every year they become less relevant. We refer
to this as a ‘melt-rate’. As a leader, it’s important to regularly
ask yourself, ‘Is our iceberg melting? If so, at what rate, and
why? In terms of individual companies, Sony is on a slip-
pery slope. Gaming is increasingly moving to the phone and
tablet, and yet it has continued to focus on gaming devices.
In the past 10 years it has implemented only incremental in-
novations, rather than making attempts to disrupt the mar-
ketplace with new ideas.
In your book you describe ‘six deadly blindfolds’—fun-
damental reasons why individuals and organizations slip
into irrelevance. What is the most important one to look
out for?
The blindfolds (see sidebar) are all manifestations of the hu-
man ego. As we accelerate forward into a world filled with
uncertainty, what people really need to do is say, ‘You know
what, I won’t always know what I’m doing; and I won’t al-
ways be the expert’. We can’t be arrogant. We need to listen,
even to negative feedback, and pay attention to what’s go-
ing on in the outside world. Because, guess what: Someone
might have figured it out better than you have!
What is an example of a company that has fallen prey to
one of the blindfolds?
The first blindfold is Arrogance, and a few years ago,
Walmart was exhibit A. Its various global expansion efforts
have never met analysts’ expectations, and Brazil Walmart
was a case in point. Launched in 1995, it was intended to
 You can only achieve so much with data. There is still a lot to be said
for the human factor — intuition, judgment and empathy for others.
prove that the company could establish strong roots any-
where in the world. The thinking among executives was,
‘what works in the U.S. will work elsewhere’. They basically
imposed a series of systems, procedures and a culture that
didn’t fit, and neglected to learn about the people of the
region. That was a strong example of corporate arrogance.
However, since then, Walmart’s mindset seems to have
shifted dramatically — for the better.
Tell us about your Reinvention Formula.
My colleagues and I depict the Reinvention Formula as an
algorithm with six elements:
1. Dissatisfaction (D): There has to be a powerful internal
felt need for change;
2. Focus (F): Next, you have to ensure there is a compel-
ling and articulated desired future state to generate for-
ward movement;
3. Alignment (A): This means ensuring shared under-
standing is in place regarding processes, tools, struc-
ture, finances and systems;
4. Execution (E): You need a comprehensive game plan,
with clear milestones in place;
5. Leadership (L): Exceptional leadership; is a must; and
6. Lastly, these five elements must outweigh the true Cost
of Change (C) relative to the reinvention effort.
The algorithm itself looks like this:
Reinvention = (D x F x A x E) L > C
We have found that the most successful change agents use
a combination of art and science to bring about powerful
change. The Reinvention Formula is the ‘science’ part of the
equation, and the skills and behavioural aspects of reinven-
tors are the ‘art’ portion.
What is the role of Big Data in reinvention?
On the one hand, access to so much data can lead to break-
Confronting the Brutal Facts
1. Melt-rate: Is your individual or organizational ice-
berg melting? If so, at what rate? And why?
2. Relevance Trend: Are you and the organization you
lead increasing in relevance in the eyes of customers
and shareholders, or decreasing in relevance? Why
or why not?
3. Adding Value: Do you continually push yourself and
your organization to add greater value for customers
and stakeholders? Why or why not?
4. Internal vs. External Change: Is your current and
projected rate of internal change greater than the
current and projected speed of external change?
Why or why not?
through insights, because you can get a lot more nuanced
information about your customers — and the world—and
that allows you to break down what you’re doing into granu-
lar detail. On the other hand, at the end of the day, you can
only achieve so much with data. There is still a lot to be said
for the human factor — intuition, judgment and empathy for
others. Like most things in life, a balance is required.
The tone of your book is one of urgency. What is your
parting message for our readers?
The need to be flexible, adaptable, humble and actively
engaged in changing your organization has been firmly in
place since the Age of Disruption was launched in the early
1980s. The difference now is the degree, intensity and scale
to which these attributes need to be modeled. The bottom
line is, it’s always better to change before you have to rather
than because you have to.
Kate Sweetman is the co-author of Reinvention: Accelerating Results in the
Age of Disruption (Greenleaf Book Group Press, 2016). She is the Founding
Principal and Chief Client Officer of SweetmanCragun Group and a Visit-
ing Coach and Lecturer at MIT’s Legatum Centre for Entrepreneurship.
rotmanmagazine.ca / 103
 FACULTY FOCUS Spike W. S. Lee, Professor of Marketing, Rotman School of Management
How Sensory
Cues Affect
Our Thinking
THE HUMAN MIND is highly adaptive, con-
stantly adjusting itself to situational de-
mands. Situations that tap into our mo-
tives are particularly effective at getting
the mind going. For example, if your self-
esteem or moral standing is threatened, a
host of mental mechanisms kick in to defend your sense of
competence and integrity.
A growing body of research examines the surprising
power of subtle physical states to shift the mental processes
underlying our ‘motivated cognition’. Motivated cognition
refers to the influence of our motives on various types of
thought processes, such as memory, information process-
ing, reasoning, judgment and decision making — all of which
have significant effects on people in the workplace.
In this article I will summarize four themes from my
recent research in an effort to help leaders understand that
mental processes are not devoid of physical influence.
104 / Rotman Management Winter 2018
1. Flexibility in Goal Pursuit
Not surprisingly, people who are skilled at adapting their
goals to life’s changing circumstances tend to live happier
lives. Flexibility in goal pursuit, however, is anything but
easy. Sometimes, people have multiple goals that are hard
to prioritize (e.g., obtaining tenure vs. spending time with
family), forcing them to switch back and forth (e.g., working
on papers vs. taking the kids out). Other times, people pur-
sue a single focal goal but get derailed by issues of all kinds,
from last-minute meetings to unexpected health problems.
And other times, people’s goals are unattainable, but they
are unable to disengage from them — especially if they are
the tenacious type.
Proactively adjusting your goals encompasses diverse
psychological capacities, including withdrawing effort and
commitment from unattainable goals and identifying and
re-engaging with more attainable or ‘priority-deserving’ al-
ternatives. Research, however, has offered little help in terms
 Risk assessment is often driven by momentary feelings—
even if they are entirely incidental to the risk at hand.
of practical strategies to enhance this important ability.
My collaborator, Kellogg Professor Ping Dong and
I took up this challenge in a recent paper, published in the
Journal of Experimental Psychology: General. In it, we theorize
that the tactile experience of physical cleansing might help to
reorient an individual’s goal pursuit.
In its most basic sense, ‘physical cleansing’ involves
separating traces of a substance from a target object, where
that separation is physically realized (i.e., detached, re-
moved); where traces are physical (i.e., dirt, grease); and
where the target object is physical (i.e., a body, a table). We
proposed that such a basic physical experience can serve as
the basis for higher mental processes—especially when they
share similar properties.
‘Psychological cleansing’ shares similar properties, in-
sofar as it involves separating traces from a target object,
whereby that separation is psychologically realized (by dis-
sociating or diminishing), traces are from psychological
experience (e.g., sinning, choosing), and the target object is
psychological (e.g., self, other).
We felt that by invoking the same underlying relational
structure of ‘separation’, physical cleansing could produce
the effects of psychological cleansing. Across four experi-
ments, we found evidence that a simple act of physical
cleansing can diminish or amplify the effects of activated
goals: Cleaning one’s hands with an antiseptic wipe — under
the pretense of ‘product evaluation’ — was found to diminish
the mental accessibility, behavioural expression, and judged
importance of a previously-activated goal. It also amplified
the judged importance of a subsequently-activated goal.
An alternative manipulation that produced psycho-
logical separation also affected the relative importance of
previously and subsequently activated goals — but the
effects disappeared once people wiped their hands clean,
suggesting that cleansing did serve the function of psycho-
logical separation.
This pattern of results emerged across a variety of goal
settings, reinforcing our view that cleansing functions as a
domain-general procedure of psychological separation. Put
simply, daily acts of cleansing — mundane as they seem —
may generally enhance our ability to pursue our goals in a
flexible manner.
2. Dissonance in Decision Making
Alongside goal pursuit, decision making is another key skill
required of today’s employees. Classic research shows that
after people make a free choice between similarly-attractive
options (e.g., launching one business plan vs. another, merg-
ing two firms vs. not), they often experience ‘post-decisional
dissonance’ (‘Did I make the right decision?’).
Such dissonance is unpleasant and motivates people
to justify their choice by developing a stronger preference
for the chosen option over the rejected option. The result-
ing post-decisional bias is termed the ‘spreading of alterna-
tives’. To the extent that this bias results from lingering con-
cerns about one’s recent decision, my collaborator Norbert
Schwarz and I wondered if physical cleansing might reduce
the classic spreading-of-alternatives effect — again, because
cleansing could function as a psychological procedure ca-
pable of separating a past experience (e.g., decision making)
from the present.
We tested this hypothesis by conducting a pair of exper-
iments in the context of consumer choice, for a paper pub-
lished in Science. As predicted, after choosing between two
similarly-attractive music albums, people tended to rank the
chosen album as ‘better’ than the rejected one — but this
tendency was completely eliminated once they had used (vs.
examined) a bottle of hand soap. Likewise, after choosing
rotmanmagazine.ca / 105
 between two fruit jams, people tended to expect the chosen
jam to taste better than the rejected jam, but this tendency
was also eliminated once they used (vs. examined) an anti-
septic wipe. Our results suggest that people can ‘wipe off ’
the classic bias of post-decisional dissonance.
3. Economic Exchange and Error Detection
Beyond the tactile realm, my collaborators and I have ex-
plored how olfactory cues alter motivated cognition. Smells
are not only potent memory triggers, they also convey rich
social meanings. For example, a linguistic analysis of meta-
phorical expressions in 18 languages found that in every lan-
guage studied, ‘social suspicion’ is metaphorically indicated
by a bad smell. This smell–suspicion link appears to be uni-
versal, but with culture-specific differences.
Stimulated by these observations, we conducted two
behavioural experiments, published in the Journal of Person-
ality and Social Psychology, among English speakers in the
U.S. to investigate whether a ‘fishy’ smell would elicit social
suspicion and thus undermine trust-based economic activity.
We found that if people were exposed to a subtle
amount of the fishy smell (vs. a non-fishy bad smell, or a
neutral smell) while deciding ‘how much money to invest’,
they tended to invest less money in a trust game, presum-
ably because the bad smell elicited concerns about others’
reciprocity. Extended replications among English speakers
in Australia found the same pattern of results and further
showed that the suspicion-eliciting effect of the fishy smell
was sufficient to override pre-existing individual differenc-
es in trust.
Is it a good thing or a bad thing that a bad smell can
reduce trust-based economic behaviour? It depends. High
levels of trust are generally conducive to organizational
strength and economic growth. But in contexts where mali-
cious intent is harboured by many, low levels of trust may
be the adaptive default, insofar as distrust motivates cogni-
tive vigilance.
For example, incidental exposure to a fishy smell has
been shown to enhance people’s likelihood of detecting mis-
leading claims and overcoming their confirmation bias in
106 / Rotman Management Winter 2018
logical reasoning, which are clearly important intellectual
abilities to cultivate. A precise understanding of which smells
are capable of setting off which mental processes (other than
suspicion and vigilance) would be immensely useful.
4. Risk Perception and Policy Preference
Feelings elicited by perceiving the risk posed by one hazard
can spill over to heighten perception of the risk posed by
other, unrelated hazards. Accordingly, even a minor event
in daily life — if it conjures up images of recent threats as-
sociated with strong feelings — could bias risk perception in
multiple domains.
My colleagues and I conducted a test of this hypothesis
in 2009, in the midst of the swine-flu pandemic, which had
spread from initial cases in Mexico to over 70 countries and
all 50 states of the U.S., resulting in 30,000 documented
cases with 145 deaths worldwide within two months. Exten-
sive media coverage highlighted contagion risks and offered
hygiene recommendations, from frequent hand washing to
wearing face masks and avoiding physical contact.
To cue ‘the threat of contagion,’ we conducted two
experiments, published in Psychological Science, by arrang-
ing for participants to encounter a sneezing person before
answering questions about perceived risks. If students in
public areas of campus buildings had walked past an indi-
vidual who was (vs. was not) sneezing and coughing, then
when later approached by a different experimenter to com-
plete a questionnaire, they perceived higher risks of not only
contracting a serious disease, but also of unrelated threats
such as having a heart attack before age 50 and dying from
a crime or accident. They also evaluated the U.S. healthcare
system to be more in need of revamping and rebuilding.
Likewise, if pedestrians in shopping malls and down-
town business areas were approached by an experimenter
who was coughing and sneezing while administering the
questionnaire, they shifted their policy preference from in-
vesting $1.3 billion from the federal budget on ‘the creation
of green jobs’ to investing it on ‘vaccine development’. Ap-
parently, the policy implications of even brief exposure to
disease cues are nothing to sneeze at.
 New from Rotman-UTP
Publishing

Working in a Multicultural
World
A Guide to Developing Intercultural
Competence
by Luciara Nardon
In this book, Luciara Nardon offers a
comprehensive framework for
understanding intercultural interactions
and developing skills for successful
In closing intercultural situations.
As illustrated herein, sensory cues related to cleanliness can
help people separate the past from the present, enhance
their flexibility in goal pursuit, reduce their motivated bias
from post-decisional dissonance and effect trust-based eco-
nomic behaviour.
These findings make it clear that our mental process- Stumbling Giants
es are not devoid of bodily influence. If any theory of the Transforming Canada’s Banks for the
Information Age
mind is to offer practical advice on structuring physical
environments that promote productivity and innovation, it by Patricia Meredith and James L.
Darroch
must attend to what happens outside of the head, as well as
Stumbling Giants presents a new vision
within it.
for the Canadian banking industry and
a call to action for all stakeholders to
work together in creating a banking
system for the twenty-first century.

It’s Not Complicated

The Art and Science of Complexity in
Business
by Rick Nason
It’s Not Complicated offers a paradigm
shift for business professionals looking
for simplified solutions to complex
problems and presents actionable
models to identify, understand, and
deal with complexity in business.

Spike W. S. Lee is an Assistant Professor of Marketing at the Rotman

School of Management. utorontopress.com
Rotman faculty research is ranked #3 globally by the Financial Times.

rotmanmagazine.ca / 107
 QUESTIONS FOR Scott Galloway, Professor, Stern School of Business, NYU

Q
&A
An NYU Professor predicts
which of ‘The Four’ will be
the first to reach a trillion-
dollar valuation.
Interview by Karen Christensen
You have closely studied the companies you call ‘The
Four’—Google, Apple, Facebook and Amazon. Which do
you predict will become the world’s first trillion-dollar
company?
Most people would put their money on Apple, because it’s
the closest to that valuation at the moment, but I actually
think it’s going to be Amazon. To date, The Four have most-
ly gone after befuddled prey within their respective sectors;
but over the last 24 months, they’ve started to encroach on
each other’s territory. And, in every instance where there has
been an overlap of competition, Amazon has beat the others.
Take the case of search. Some people describe Amazon
as ‘a search engine with a warehouse attached to it’. So, de-
spite the fact that it is Google’s largest customer, it also com-
petes with Google. In 2015, 44 per cent of searches involving
a product search began on Amazon; and by 2016, that had
climbed to 55 per cent. Amazon’s growth of share of relevant
search for products grew 25 per cent year-over-year.
In the hardware realm, they’re competing against Ap-
ple. If you ask any tech expert, ‘What was the most innova-
tive hardware innovation of 2015 and 2016?’ most would say
it was Amazon’s Alexa. So, a company that had almost no
reputation for hardware innovation is now considered one
of the most innovative in tech hardware.
If you look at where Amazon overlaps with Face-
book and Google in digital marketing, Amazon’s digital-
marketing offering, Amazon Media Group — which sells

108 / Rotman Management Winter 2018

 In every instance where there has been an overlap of competition
between The Four, Amazon has come out on top.
advertising on the platform — is growing from somewhere
between 40 and 60 per cent per year. It’s now bigger than
Snapchat and will probably be bigger than Twitter within
two or three years.
Meanwhile, Amazon’s media market offering is now
growing faster than Google’s or Facebook’s, and will start to
impact their share; and Amazon is also competing against
Apple in terms of video streaming. In 2015, they controlled
two per cent of all video streaming time and were ranked
seventh; in 2016, they controlled four per-cent — they dou-
bled their share and jumped to number 3, just behind Netf-
lix and YouTube. Whenever Amazon bumps up against one
of the other Four, it wins.
In addition, with the acquisition of Whole Foods, it is
about to become the fastest-growing offline retail company;
and it’s also the dominant market share leader in the world
of the Cloud, which is the most profitable and fastest-grow-
ing segment of technology. In a seemingly endless number
of businesses or sectors, when Amazon issues a press re-
lease, it is viewed as a credible threat or player. Amazon has
extraordinarily-cheap access to capital. This year it will be
the second largest spender on original content at four and a
half billion, second only to Netflix, at six billion.
We simply have never seen a company like this before,
that is so well-positioned in so many categories. It is now in
more U.S. homes than homes have landline phones — or that
voted in the 2016 election. For all of these reasons, I believe
Amazon will be the first trillion-dollar company.
Many believe that Amazon’s core assets are its opera-
tional capabilities, engineers and brand—but you dis-
agree; please explain.
I would argue that Amazon’s core competence is storytell-
ing. Amazon has reshaped the relationship between firms
and markets in that it has replaced the traditional profit
narrative with one of vision and growth. You can trace this
all the way back to Jeff Bezos’ 1997 memo, where he said,
‘We’re going to invest for the long-term across things that
we know will be important for decades to come’. In that
memo, he mentioned speed, selection and price. The mar-
kets really warmed to this long-term vision, and Amazon
has stayed true to it.
As long as that story remains compelling and consis-
tent, the marketplace will put the value of Amazon in what
can only be described as an ‘anti-gravity bucket’. Compar-
ing it to other companies in similar spaces makes absolutely
no sense. There is no way to fundamentally value this com-
pany, rationally.
People keep talking about a day of reckoning for Ama-
zon, but that day has not come in 15 years. It has been able
to create what is the ultimate competitive weapon: Access
to cheap capital through a competence called storytelling.
It has an ability to paint an extraordinary vision and then
execute against it incrementally every single day, which re-
sults in cheaper and cheaper capital, which it can then rein-
vest — so, it becomes an upwards spiral.
In your view, why is Jeff Bezos so interested in talking
about social issues, such as a minimum income and neg-
ative income taxes?
He is basically hinting that there are not going to be enough
jobs for people in the future, so we should just start paying
people to stay home and not work. I find this both fright-
ening and disappointing. Work is very central to our iden-
tities and our culture. There’s a ton of evidence that when
people work, they’re much happier, because we get a certain
amount of our self-worth from work. The notion that one of
the smartest business leaders of our generation has sort of
‘thrown up his hands’ on this is very troubling.
In 2015, Apple defied a court order mandating it to unlock
a mass murderer’s iPhone. Did it do the right thing?
I don’t think so, and this is further evidence of our idolatry of
innovators. Just imagine if the terrorists in San Bernardino
rotmanmagazine.ca / 109
 Eighty per cent of our free time is now spent on a smartphone app,
and five of the top 10 apps are owned by Facebook.
had used a BlackBerry, and the FBI had issued a court or-
der to unlock a Blackberry phone from Research in Motion
in Waterloo, Canada. If they had disputed or refused the
court order, within 48 hours, we would have had legislation
in place to put a trade embargo on all of Canada. But, be-
cause it was an iPhone, people saw it as sort of a religious
object—somehow holy and untouchable. We treat these in-
novators and these objects with reverence and credibility
that, in my opinion, is scary — and just plain gross.
You have suggested that Apple should launch the world’s
largest tuition-free university. Tell us more about this
idea.
All four of these companies have been strategically master-
ful at identifying sectors that are ripe for disruption. The
way you do that is, you look at a sector that has raised prices
faster than inflation, with no underlying increase in produc-
tivity or value. By these measures, cable television was a
prime candidate for disruption. Its main offering has barely
changed over the years, but prices have outpaced inflation.
Whereas, if you look at the car industry, the price of a Mer-
cedes S-Class on an inflation-adjusted basis is actually the
same — or a bit less — than it was 20 years ago, despite the
fact that it is a totally different car on just about every di-
mension: performance, efficiency, mileage, materials. So,
you could argue that cable is ripe to be disrupted, and the
auto industry is not.
I would argue that the industry that is most ripe for
disruption is education. If you look at the cost of tuition, in
the U.S. at least, it has outpaced cable television and even
healthcare. It has been extraordinary. On Monday nights
this spring, I taught 160 kids who paid $6,000 each. That’s
$960,000 in tuition; twelve nights at $80,000 a night. I
teach for 180 minutes, minus a 20-minute break, so that’s
160 minutes, which means the class is worth $500 per min-
ute. You know what? I’m good, but I’m not that good.
110 / Rotman Management Winter 2018
Apple could come in and launch a university with a
mix of offline and online courses. It has the brand and the
credibility to do this, and I think it could potentially spark a
revolution in education that would force other institutions to
lower their prices.
At $420 billion, many believe that Facebook is overval-
ued. What is your take?
I’m not an equity analyst, so it’s difficult for me to say, but
I will say that Facebook is the most successful commercial
product in the history of mankind. It has a meaningful rela-
tionship with almost two billion people on the planet. That
is more than Communism, Capitalism and Christianity. The
only thing I can think of that touches more individuals is soc-
cer, which has three billion fans, globally. But soccer doesn’t
have the economic relationships that Facebook does.
Why is it such a hit? Because it taps into our strong need
to love and to be loved. It creates a lot of empathy and con-
nections between people, and it has used technology to scale
that. It also has fantastic targeting abilities that make it mas-
sively profitable. It has defied the laws of big numbers and
continues to grow at 40 per cent per year, despite being a
very large company.
Eighty per cent of our free time is now spent on a smart-
phone app, and five of the top 10 apps are owned by Face-
book. If you think the mobile phone is really the biggest shift
in our culture, some would argue that it’s essentially just a
technology for Facebook.
You believe that several companies have the potential
to become the fifth member of this succesful group, in-
cluding Alibaba, Tesla, Netflix, Uber, Walmart, Microsoft,
Airbnb and IBM. Which has the best shot at the moment,
and why?
That’s a tough one. I would say either Microsoft or Netflix;
Microsoft because of its B2B capabilities and its super
 IDEAS
THAT
INSPIRE
NEW THIS SEASON

Creating Great
Choices
robust business. It competes really well in a number of dif- Tools, exercises, and
ferent areas, and it’s also a pretty big player in the Cloud. advice for how to use
But my bet would probably be on Netflix. A lot of us are now integrative thinking when
spending a lot of time in front of this ‘operating system for facing a tough choice.
joy in our lives’. And, if you believe that Millennials are go-
ing to own the future, they already spend more time in front
of a Netflix screen than all other cable and television chan-
nels combined.
If the operating system for television and entertain-
ment at home becomes Netflix — which seems to be happen-
HBR’s 10
ing—they should be able to monetize that in ways that are
Must Reads
fairly extraordinary. So, I would bet on them to be number
five, with an outside chance for Microsoft. And my third pick
2018
would be ‘TBD’ — because there are probably a couple of The definitive management
kids in a dorm room at MIT right now coming up with some- ideas of the year from
thing we can’t even imagine. Harvard Business Review.

Entering
StartUpLand
Is working in a startup
right for you? Learn more
from an industry insider’s
unique perspective.

Scott Galloway is a Professor at New York University’s Stern School of

HBR.org/books
Business. He is the author of The Four: The Hidden DNA of Amazon, Apple,
Facebook and Google (Portfolio/Penguin, 2017).

rotmanmagazine.ca / 111
 FACULTY FOCUS Chen-Bo Zhong, Professor of OB and HR Management, Rotman School of Management
How Ideas
Rise from Chaos
MANY DAY-TO-DAY workplace activities are
characterized by ‘hierarchical structure’.
For example, the lean-manufacturing
system categorizes all components in-
volved into clearly-defined categories,
so that workers can easily distinguish be-
tween items and use the correct components on manufac-
turing lines.
In many cases, information is also highly structured in
the workplace. Since employees are clustered around jobs
and roles, both explicit information (as compiled in a job
manual) and implicit information (which is implied or un-
derstood by the worker) are categorized by job function.
Without disputing the recognized benefits of hierarchi-
cal structure, I recently conducted research with Rotman
PhD Candidate Yeun Joon Kim to determine if such struc-
ture might also come with a high cost: reduced creativity.
For our work, we defined creativity as ‘combinations
of information that are both novel and useful’. We used the
term information broadly, per the definition of ‘declarative
112 / Rotman Management Winter 2018
information’, which includes ‘chunks’ of information such
as objects, symbols and facts that possess distinguishable at-
tributes. For example, a chair contains at least three pieces
of declarative information: a seat, legs and a back — each of
which refers to a specific part with unique attributes that are
distinguishable from the others. In this sense, in the realm of
production, raw materials can be considered to be declara-
tive information.
We suspected that a hierarchical structure featuring de-
clarative information might be a double-edged sword: On
the one hand, as research shows, it clearly increases efficien-
cy; on the other, we felt that it may reduce the generation
of creative ideas, because the presence of higher-order cat-
egories could reduce ‘distal’ or uncommon associations. For
example, the inventor of the wheelchair needed to connect
two distal pieces of declarative information: ‘wheel,’ which
typically belongs to the vehicle category, and ‘chair,’ which
belongs to the furniture category. We posited that such as-
sociations are less likely to take place when the information
provided to workers is highly structured.
 We felt that a flat information structure might
actually increase cognitive flexibility.
Hierarchichal vs. Flat Information Structures
‘Information structure’ refers to the way in which units of in-
formation are associated with one another within an infor-
mation set, and it can be either hierarchical or flat.
In a hierarchical information structure, information
is organized by higher-order categories, whereby units of
information within each category have strong conceptual
relationships, but those between categories have weak con-
ceptual relationships. In a flat information structure, infor-
mation is presented without higher-order categories and
units of information have weak conceptual relationships
with each other.
To illustrate, an information set that includes ‘cat’, ‘dog’,
‘cow’, ‘mouse’ and ‘tiger’ is hierarchically organized under
the higher-order category of ‘animal’. On the other hand,
a set of information such as ‘pudding’, ‘Ukraine’, ‘cheque’,
‘mouse’ and ‘symphony’ has a flat information structure,
because these terms do not share any obvious higher-order
category. We posited that the latter would lead to higher
levels of creativity, mainly due to the ‘cognitive flexibility’
it engenders. Cognitive flexibility is the extent to which in-
dividuals can easily switch their focus between different
categories or perspectives — making it more likely that they
will integrate distal information in unique ways. Previous
studies have found a positive relationship between cognitive
flexibility and creativity.
We felt that in a hierarchical information structure, the
presence of a higher-order category influences the interpre-
tation of the information in that category, reducing the pos-
sibility for alternative uses of the information; and that in a
flat information structure, the absence of higher-order cat-
egory allows individuals to discover alternative interpreta-
tions of the information and increases cognitive flexibility.
In addition, we felt that a flat information structure
might actually increase cognitive flexibility, because it intro-
duces higher probabilities of making distal connections be-
tween concepts. By definition, the flat information structure
has a flat associative hierarchy, meaning that each unit of
information has approximately equal probabilities of being
next to any other units of information in the set. Therefore,
compared to those in the hierarchical information structure
condition, individuals presented with a flat information
structure may be more likely to discover serendipitous as-
sociations between distal information.
Given that our conscious imagination is bounded and
our ability to associate distal categories (i.e., cognitive flex-
ibility) is limited, serendipity can refresh habitual thinking
and open up new possible associations. History provides
numerous instances where serendipitous discoveries —
such as the Archimedes principle or the X-ray — have en-
riched our lives. Based on these previous findings, we felt
that a flat information structure would increase the chances
for serendipitous, flexible uses of information.
Our Research
We tested our predictions in three experiments, using a sen-
tence construction task and a LEGO task. In the sentence-
construction task, participants were given a set of words and
asked to construct meaningful sentences out of the them.
In the LEGO task, subjects were asked to construct an alien
figure from a set of LEGO bricks. Both tasks involved assem-
bling components, but there was no one ‘correct’ way of do-
ing things, and hence efficiency was not a relevant criterion.
One-hundred-and-sixty undergraduate students vol-
untarily participated in this experiment in exchange for one
course credit. Upon arrival, participants were randomly as-
signed to either a hierarchical information condition or a flat
information structure condition. Each received two sheets of
letter-size paper and a pencil; the first sheet contained 100
nouns, and the other sheet was for writing down sentences.
In the hierarchical condition, participants were pro-
vided with a sheet of letter-size paper containing the 100
English nouns organized by 20 categories. Each category
contained five nouns that were conceptually related. We did
not provide specific names for each category. In the flat
information structure condition, the same 100 English
rotmanmagazine.ca / 113
 nouns were presented on a sheet of paper without any
categorization. Participants were instructed to generate
as many sentences as they could by combining the nouns,
taking as much time as they needed within a 60-minute
time limit.
To evaluate levels of creativity in the sentences gen-
erated, three undergraduates from the Linguistics depart-
ment of a North American university were recruited. They
evaluated the level of creativity of each sentence from
1 (not at all creative) to 7 (extremely creative).
RESULT: In Study 1, participants presented with disorganized
information — a flat information structure — were more
creative than those presented with information organized
by categories. The beneficial effect of the flat information
structure on creativity was mediated by cognitive flexibility.
For Study 2, in exchange for a course credit, 117 undergrad-
uate students were recruited. We used the same task as in
Study 1; the only difference was that we provided 45 English
nouns instead of 100. Participants were randomly assigned
to the conditions and received a sheet of paper containing
45 nouns either organized by nine categories or unorga-
nized. They were asked to construct as many sentences as
they could by combining provided nouns. Unlike Study 1,
which used a paper-and-pencil survey, these participants
entered their sentences online.
To evaluate the sentences created, we recruited three
PhD candidates to evaluate (1) creativity (‘how creative is
this sentence?’); and (2) creative use of the provided nouns
(‘how creatively has the participant used the provided
noun(s) in this sentence?’).
RESULT: Study 2 supported our hypotheses. Participants in
the flat-information structure condition generated more
creative sentences than those in the hierarchical informa-
tion structure condition using different measures of cre-
ativity. In addition, the effects of information structure on
creativity were mediated via cognitive flexibility such that
those in the former condition used nouns from more cat-
114 / Rotman Management Winter 2018
egories than those in the latter condition.
In Study 3, we attempted to show that our predic-
tions are not limited to abstract constructs, but apply to
an instance that involves combining units to create new
objects. LEGO bricks are analogous to units of informa-
tion in many ways and, similar to information, there are
almost an infinite number of alternative combinations of
LEGO bricks.
Just like new information can be created by combin-
ing existing information, LEGO bricks can be combined to
make complex shapes and structures (e.g., houses, robots,
and creatures). Also, similar to other declarative informa-
tion, LEGO bricks can be categorized by higher-order cat-
egories such as colour and shape.
In exchange for one course credit or ten dollars, 182
undergraduate students voluntarily participated in this
experiment. We used the Alien Task developed by Univer-
sity of Alabama Professor Thomas B. Ward. Originally,
this task asked participants to imagine that they are visit-
ing a planet in another galaxy and encounter an alien who
lives on that planet—and to draw that alien. Instead of
drawing an alien, we asked participants to build one out
of LEGO bricks.
Upon arrival, participants were randomly assigned to
either the hierarchical or flat information structure con-
dition. In the hierarchical condition, a total of 442 LEGO
bricks, which consisted of nine colours and 11 quadran-
gular shapes (99 possible categories), were categorized
into two large boxes. Each box had 24 cells (four rows, six
columns) partitioned by plastic walls. The bricks were cat-
egorized by a total of 48 cells. In the flat information struc-
ture condition, the same LEGO bricks were contained in
two large boxes of identical size to those in the hierarchi-
cal information structure condition. However, in the flat
condition there was no partition, so all the 442 bricks were
mixed and divided into the two large boxes.
Participants were instructed not to pour the bricks onto
the table and could only take pieces directly from the boxes
when they needed them. Three independent raters were
recruited to evaluate the creativity of the LEGO aliens.
 Participants presented with disorganized
information were more creative.

RESULT: Participants in the flat-information condition made To reap the benefits of a cross-functional team, our re-
more creative alien figures than those in the hierarchical search suggests that managers might need to create a flat
condition. Further, the effects of structure on creativity information structure. This can be achieved by formal pro-
were mediated by both cognitive flexibility and persistence. cedures such as having team members jot down as many
new ideas as possible and then mixing them up (so as not
Implications for Managers to make any organizing categories salient) before combining
Across three studies, we found that individuals presented them for new product development.
with a flat information structure were more creative com- As indicated herein, in addition to making information
pared to those presented with a hierarchical information available to employees, how that information is presented is
structure. We also confirmed that the increased creativity a critical factor that affects creative output.
in the flat information structure conditions was due to the
resulting increased level of cognitive flexibility.
Organizational studies have had a long history advo-
cating for hierarchical structures that increase the efficiency
of work. This makes sense, because the processing of large
amounts of information is limited by human capacity. As a
result, structures have emerged to reduce complexity and
enhance efficiency. For this reason, many organizational
activities are built around hierarchical structures.
The principle of division of labour, for example, orga-
nizes labour forces by worker specializations, creating a
hierarchical information structure where information clus-
ters around job roles and skills. Such structures are impor-
tant and are often necessary to promote efficiency.
However, when it comes to creativity, rigid walls be-
tween categories in hierarchical information structures
may be harmful, because creative ideas often rise from
combining of distal information. Put simply, a hierarchical
information structure seems to prime the ideation process
within particular cognitive categories, whereas a flat infor-
mation structure frees up flexible exploration over distal
cognitive categories.

In closing
Researchers have suggested that functional diversity in
teams increases creativity, because team members from
various functional and cultural backgrounds bring different
repertoires of information to team ideation processes. Our
findings provide clues for better managing functionally-
diverse teams.
Chen-Bo Zhong is an Associate Professor of Organizational Behaviour
and HR Management at the Rotman School of Management. Yeun Joon
Kim is a PhD Candidate in Organizational Behaviour at the Rotman
School. This article is a summary of their paper of the same title, which
was published in the journal Organizational Behaviour and Human Deci-
sion Processes and can be downloaded online.
Rotman faculty research is ranked #3 globally by the Financial Times.

rotmanmagazine.ca / 115
 QUESTIONS FOR Angela Zutavern, Machine Intelligence Expert, Booz Allen Hamilton

Q
&A An expert in machine
intelligence describes
the potential of
‘the mathematical
You believe that the world of leadership has hit an inflec-
tion point. How so?
As useful as popular mental models and heuristics are, ma-
chine models now outstrip human performance in about half
of the portfolio of cognitive tasks. Going forward, we will be
able to beat machine models less and less often — except in
the realms of imagination, creativity, problem-solving and
some kinds of reasoning.

Enter the ‘mathematical corporation’. How do you define

this new type of organization?
In the past couple of years, there have been major advanc-
es in machine learning, bringing massive new potential
across industries. The mathematical corporation is a term
corporation’. that describes how organizations will need to operate in the
future, to embrace these advances. Simply put, machine
Interview by Karen Christensen intelligence — built on data science — enables us to see
patterns, anomalies and associations that were previously
unidentifiable, and this emerging ability requires a new
form of leadership. In a mathematical corporation, people
actively collaborate with machines. AI basically has a ‘seat’
at the boardroom table.

116 / Rotman Management Winter 2018

 Machine intelligence enables us to see patterns, anomalies
and associations that were previously unidentifiable.
Is this about embracing Big Data?
Of course, leaders of mathematical corporations use analyt-
ics and Big Data as well as AI and other advanced technol-
ogy. But the capabilities of the mathematical corporation
extend beyond mining data sets — an endeavour that has
focused narrowly on answering known questions by query-
ing specific piles of data. The mathematical corporation also
focuses on uncovering new questions by querying a universe
of data. Searching for and answering questions outside the
spotlight of conventional thought can provide knowledge
about the future.
If the recent past was about analytics and Big Data,
the future is about the ‘big mind’ of the mathematical cor-
poration, which comes from combining the mathematical
smarts of machines with peoples’ imaginative intellect.
This is what will trigger the next leaps in organizational
performance.
Does intuition have any role in the mathematical corpora-
tion?
Intuition has served leaders well — and still does — princi-
pally because the human mind absorbs and understands
more detail and substance than we consciously know. But
with each passing day, machines are catching up. So, when
should you trust a decision to your gut, and when to data?
Most of us recognize that biases, politics and wishful think-
ing distort our perception; but as machines start to compre-
hensively reflect the real world, their biases dissipate. So,
we need both.
Former Rotman School Dean Roger Martin has said that
data can only be used to understand the past—not to
predict the future, because the future hasn’t happened
yet. How do you react to that statement?
I think Roger is probably talking about the critical skill sets
that humans bring to the table in our data-filled world,
which include things like creativity and imagination, strat-
egy-setting and vision. A machine is not going to do those
things for us, but machine intelligence can certainly be very
helpful in other ways.
For instance, when InterContinental Hotels pitches
a new offer to its loyalty club members, its marketers still
devise the content, but the computer chooses which individ-
uals get which offer. We will see more and more such part-
nerships between human and machine.
In its manufacturing processes to make vaccines, Merck
uses a four-stage process. In the past, they looked at data for
each of the four processes separately and optimized within
that process. But they continued to have problems: Batches
were going bad and they didn’t understand why. So, they
brought together the data across all four processes to opti-
mize across the system. That’s where they uncovered some
really good insights. They had suspected that raw materials
were causing the batches to go bad, but it turned out that
wasn’t the case at all. It had to do with the elements of the
fermentation process. The machine intelligence model pre-
dicted when a problem was about to happen, so that they
could stop it from happening.
In manufacturing, companies are now able to predict
when their machines will break down and do preventative
maintenance before that happens; and in sports, we’re able
to use sensor data to predict when an athlete is about to get
hurt, what kind a pitch a baseball player is about to throw,
and what’s the best way to train and condition an athlete
for a certain type of performance. So, there are already lots
of examples where data alone has been able to predict the
future.
Are humans even required in a mathematical corpora-
tion?
Absolutely! I don’t believe the doom-and-gloom scenari-
os where AI takes over the world. Humans are absolutely
critical for functions that machines just can’t do. Machine
intelligence is great at things like number crunching, rec-
ognizing patterns, organizing information and remember-
ing things; but, as indicated, people still rule when it comes
to problem-solving, reasoning, creativity and imagination.
Human leaders are absolutely critical for setting strate-
gies, for asking the big questions, and putting together the
right combinations of backgrounds to create a team that
will come up with new breakthroughs and solutions. It’s
not about choosing one or the other. It’s got to be both: The
best organizations will have human and machine intelli-
gence working together.
rotmanmagazine.ca / 117
 Searching for and answering questions outside the spotlight of
conventional thought can provide knowledge about the future.
What is your favourite example of a mathematical cor-
poration?
One of my favourites is the Data Science Bowl, which set out
to identify new ways of predicting and identifying lung can-
cer. We organized this with Kaggle — a platform for predic-
tive modelling and analytics competitions — putting it out
to a community of hundreds of thousands of data scientists
around the world. They competed (as volunteers) to develop
algorithms to find new ways of identifying lung cancer ear-
lier than it can be identified today.
Some real breakthroughs occured. Several of the win-
ners have gone on to receive funding to continue to research
these ideas and ‘productize’ the algorithm, so it can be used
more widely. I predict that we are going to see some incredi-
ble breakthroughs in the health arena. What is so cool is that
the teams that are winning these competitions don’t nec-
essarily even have a medical background. They’re able to
learn enough from online tutorials to make breakthroughs
that researchers in the medical community have been try-
ing to make for years. It goes to show that when you bring
together people with completely different backgrounds, you
often get breakthrough ideas.
Describe how Ford Motor Company is taking steps to be-
come a mathematical corporation.
It might be one of the oldest corporations in North America,
but Ford is dedicated to embracing machine intelligence.
Their new CEO, Mark Hackett, actually came from the au-
tomated vehicles area of the business — one of the key re-
search areas for machine intelligence.
In a mathematical corporation, you have to constantly
experiment, fail, learn and iterate. Ford has about 25 experi-
ments going on at any one time. They want to learn every-
thing there is to learn about transportation. In the past, like
many other companies, Ford relied on customer surveys
for feedback. But, of course, a survey is just a sampling:
You never get a 100 per cent response. So now, they are
using real data about actual consumer behaviour. The con-
sumer doesn’t have to provide the data: The sensors in the
company’s cars track and provide it. They’re learning a lot
about how people move around in the world today, and it’s
118 / Rotman Management Winter 2018
not based on what people say they’re doing, but what they
are actually doing. The fact is, in most cases, sensor data is
much more accurate than what people say.
What has to change about our approach to discovery in
today’s world?
When we’re thinking about new products and services, we
tend to reason deductively: We have a presupposed idea of
what we plan to find; we might even have drawn a model on
a napkin about the way something works. Through experi-
mentation, we then check to see whether we’re right and es-
tablish our ‘rightness’ with a large degree of certainty.
Today, we need to reason inductively. We do this by
examining the way the world currently works and inferring
relationships between key elements in the system. We rec-
ognize that we can never say for sure that we’ve discovered
the truth, but we can reach conclusions based on reasonable
logic. While the conclusion of a deductive argument is cer-
tain, the conclusion of an inductive argument is probable,
based upon the evidence.
We naturally engage in both types of reasoning, but
when we’re creating and launching a new product, we often
limit ourselves to thinking deductively, because we see that
as the only way to gain a level of certainty. With machine
intelligence, we increasingly have the opportunity to rea-
son inductively and discover new knowledge that we never
could have found on our own.
For example, in marketing, discovery in data sets can
unveil patterns in customer defections and predict means
to reverse them; in logistics, discovery can examine daily
or seasonal flow of materials or products and guide trans-
portation planning; in HR, discovery can identify unhappy
employees and guide changes in organizational practices;
in manufacturing, it can process warranty data for patterns
of product failure to suggest engineering improvements.
This type of discovery promises to turn businesses — and
lives — around.
You also believe we need to learn how to ‘re-frame ques-
tions’ for this new era. Why is that so important?
If we don’t break away from how we’ve done things in the
past, we will never be able to make the discoveries that
machine intelligence makes possible. One example that
comes to mind is the work that the U.S. Census Bureau
is doing. Over the years, it had always conducted census
surveys in the same way, by relying on enumerators — peo-
ple going door-to-door, collecting data. But recently, the
bureau’s leaders completely rethought everything about
how to conduct the upcoming 2020 ‘Decennial Census’.
They realized that they can pull data to avoid in-person
visits. For instance, sometimes they need to verify that an
apartment building is still there; today, you can do that us-
ing satellite imagery.
In addition, in the past, enumerators were just left on
their own to figure out which routes to take, what time of
day to visit, what order to go in, etc. Not surprisingly, they
often found that people weren’t home and had to make re-
peat trips. This time around, there will be a mobile app that
enumerators can use to predict the best time to make a visit,
in what order they should be made and what route to take.
That is a key example of why it’s so important to be open
to new approaches. And importantly, leaders need to recog-
nize that in many cases, the new approach they develop will
be completely different from the way they have has oper-
ated in the past.
Angela Zuterman is Vice President at Booz Allen Hamilton and the
co-author of The Mathematical Corporation: Where Machine Intelligence
and Human Ingenuity Achieve the Impossible (PublicAffairs, 2017). She
also convenes the Chief Data Officer (CDO) Council for the U.S. federal
government community.

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 QUESTIONS FOR Navi Radjou, World Economic Forum

Q
&A The man who wrote the
book on Frugal Innovation
describes the pressure
consumers are putting
What is ‘Frugal Innovation’, and why did you decide to
write a book about it?
My co-author, Jaideep Prabhu, and I wrote a previous book
in 2012, called Jugaad Innovation, based on the quick and
flexible innovation we were seeing in emerging markets like
India, Africa and China. These are places where people have
big problems but very limited resources, and that combina-
on business to do better. tion leads to improvisation and frugality that generate ultra-
affordable solutions. For example, $1,500 heart surgery, a
Interview by Carolyn Drebin $2,000 car, a $200 home solar system and a $100 school-
in-a-box. Jugaad is a Hindi word meaning, ‘the ability to
improvise a clever solution’ in adverse conditions. It’s basi-
cally the ‘MacGyver spirit.’ Our research indicated that this
clever ability to do more with less was also highly relevant
in the West.

120 / Rotman Management Winter 2018

 People want products that are environmentally
sustainable and socially responsible.
Talk a bit about the demand for Frugal Innovation.
Consumers in developed economies are becoming more
value-conscious as well as more values-conscious, and this
is putting pressure on companies to find ways to do more
— and better — with less. Frugal Innovation has two dimen-
sions: From the customer’s perspective, people want to buy
products that are affordable, easy to use, and eco-friendly;
and from the company’s perspective, the product must be
frugal to develop, using fewer resources (capital, energy,
time). The end result is greater value for the customer, the
company, society and the environment.
Tell us a bit more about the criteria that define Frugal In-
novation.
There are five criteria. The first is Affordability. Since the re-
cession, people have become more thrifty. The next is Sim-
plicity. Everyone wants to simplify their lives. Many people,
especially Millennials, are embracing a lifestyle of minimal-
ism. Sustainability is the third criterion. As indicated, people
want products that are environmentally sustainable and so-
cially responsible. The fourth criteria is Quality. Just because
an innovation is frugal, that does not mean that quality can
be compromised, especially in sectors like healthcare. In ad-
dition to these four tangible criteria, a frugal solution must
embody a Purpose: it must contribute to the well-being of
our society.
Can you give us an example of these elements working
together in harmony?
One great example is the clothing company Eileen Fisher. In
a time of fast fashion, this company is pioneering ‘frugal fash-
ion’: It wants its customers to buy fewer but longer-lasting
clothes and it has a proactive plan to become one of the most
sustainable and socially-responsible fashion companies.
In the apparel industry, 97 per cent of garments today
are made overseas by poorly-paid workers crammed into
squalid factories. But Eileen Fisher is keeping 25 per cent
of its production in the U.S. Across all of its manufacturing
activities at home and abroad, the company is investing in
organic materials, and is trying to eliminate chemical dyes.
It is also using processes that rely less on water, paying its
contract workers better and offering employees self-devel-
opment opportunities. Additionally, the company is intro-
ducing programs to incentivize people to bring back their old
clothing to be ‘up-cycled’ or re-used. They are even hiring
young designers to re-use the fibres from old clothes to craft
beautiful new garments.
How does the traditional model of R&D change when
companies innovate frugally?
You don’t need a big R&D lab and a billion-dollar budget to
innovate. Under the old model of product development, it
would take years to create, test and launch a product. Frugal
Innovation uses a much more targeted and economical ap-
proach: Companies zero-in on what customers really want,
introduce that product to the marketplace quickly, and con-
tinually improve it, based on customer feedback.
Another change in the R&D world is the concept of
Open Innovation, which entails sharing knowledge between
departments, partnering with start-ups, re-using technolo-
gies and recycling knowledge — even amongst competi-
tors. Imagine taking some existing intellectual property
and applying it to a whole new domain. For example, Gen-
eral Electric took ultrasound technology developed in its
rotmanmagazine.ca / 121
 We are seeing an expanding sharing economy for consumers,
and the next phase will be business-to-business sharing.
medical division and applied it to the energy sector, as a tool
to inspect oil and gas pipelines.
Another great example is Ford Motor Company,
which set up a TechShop in Detroit — a do-it-yourself pro-
totyping studio where employees can go to tinker in their
spare time. It’s basically a playground for adults that is open
24/7. This facility is equipped with 3D printers and advanced
tooling equipment, so if an engineer has a disruptive idea,
she can go in there, rapidly prototype it, and then show it to
her boss and say, ‘This is what I was trying to explain to you’.
This approach leads to faster approvals than a PowerPoint
presentation ever could. Within three years of setting up this
TechShop, Ford boosted its patentable ideas by over 100 per
cent — without having to invest any more in R&D.
The old model of mass production has become so waste-
ful that you believe today’s companies must ‘flex their as-
sets’. Please explain.
Your company’s assets should not only create value in terms
of new products and services: they should also be operating
at optimum levels. For example, older buildings that leak
energy and contribute to emissions need to be optimized
for efficient energy use. New technology allows existing
buildings to be reconfigured to save energy — for example,
by having the lights and air-conditioning turn off automati-
cally when a room is empty.
We still have the legacy of centralized mass production,
whereby something is built in large quantities in a big fac-
tory and shipped in massive containers around the world.
What if we ‘flexed’, or optimized, not just assets like equip-
ment or buildings, but the whole supply chain? The idea is
that supply chain assets could be distributed so that, instead
of having one centralized factory, you might have several
‘micro-factories’. These smaller production units could be
122 / Rotman Management Winter 2018
linked to smaller distribution units (‘micro-stores’). As a
result, a company could sense and respond faster to its cus-
tomers’ needs in a localized way, while saving resources
and emissions.
For example, big-pharma company Novartis, in part-
nership with MIT and the FDA, has created micro-facto-
ries no bigger than a container, which allow them to make
drugs up to ten times faster, reduce operating costs by 50
per cent, and emissions by up to 90 per cent. They also have
better traceability for their products and are far more flex-
ible. Many other industries are now adopting the concept of
micro-factories—from automotive to bio-medical.
What does it mean to ‘hyper-collaborate’?
This is a very radical idea. Today we are seeing an expand-
ing sharing economy for consumers, including car sharing,
bike sharing and home sharing. The next phase of this will
be business-to-business sharing. The idea is that multiple
companies will come together to share resources — and that
one company’s waste is another’s raw material.
In Denmark’s Kalundborg Eco-Industrial Park, for ex-
ample, waste coming from a steel company is used by an-
other company to make cement. Companies can even go
beyond mere waste and asset sharing and share their em-
ployees, and even their clients and customers. This is a ho-
listic ‘integrated ecosystem’ approach that recognizes that
companies have more to gain by sharing than by competing.
A very advanced level of hyper-collaboration is shar-
ing intellectual property. Electric car company Tesla has
opened up its patents so other companies can use them to ac-
celerate the transition to electric cars. I think whatever trend
starts out as B2C (business to consumer) soon becomes B2B.
When you look at Millennials, they don’t see a separation
between how they act as a consumer and as an employee.
 From the Landfill to a Spiral Economy

• Turn waste into wealth

• Design multi-purpose products

• Digitally enrich physical products

• Create products that adapt to evolving

customer needs

• Get ecosystems to embrace sustainability

6 Principles of Frugal Innovation

They car share, apartment share — so why not share at work?
1. Engage and iterate
This is already happening in start-up incubators, and in the
next decade, Millennials will rise to power in companies and 2. Flex your assets
radically change the corporate culture. 3. Create sustainable solutions

Frugal Innovation is an optimistic way of looking at the 4. Shape customer behaviour

global economy. Is it at odds with our current geo-political 5. Co-create value with ‘Prosumers’ (consumers who
climate? want to be involved in the design of a product or
We need to take a global view. Emerging markets are growing service).
in confidence. There is a big void left by the Americans when
6. Make ‘innovative friends’
it comes to global leadership, and other players such as China
and India are eager to take the centre stage. Frugal Innova-
tion is more relevant than ever today. With climate change,
we all need to learn how to do more with less. When faced
with adversity, there is even more motivation. We in the West
can’t afford to be complacent — especially now.

What lies ahead for Frugal Innovation?

In the past, people were brought up to think in a linear fash-
ion — linear supply chains, linear career paths — but Mil-
lennials are far more mobile in their approach, and future
generations will be even more fluid. That must be taken into
consideration by anyone considering a frugal approach. We
all have to become more adaptable.
Also, as indicated, companies are slowly starting to
share their assets and resources, especially when it comes
to sustainability and value creation. Innovation is being
democratized. The ‘jugaad mindset’ says, instead of invest-
ing in a Skunkworks-style innovation project, why not just
unleash the creativity and ingenuity of your employees and Navi Radjou is the co-author of Frugal Innovation: How To Do More
engage with customers and suppliers to co-create a frugal With Less (Economist Books, 2015). He is a member of the World Eco-
nomic Forum’s Global Future Council on Innovation & Entrepreneurship
solution?
and a Fellow at Judge Business School at the University of Cambridge.
His TED Talk, “Creative Problem-Solving in the Face of Extreme
Limits,” can be viewed online. He lives in Silicon Valley.

rotmanmagazine.ca / 123
 QUESTIONS FOR Heidi Franken, Deputy Director of Enforcement, Ontario Securities Commission

Q
&A The head of the OSC’s
Office of the Whistleblower
describes its creative
solution for ending
You head up the Ontario Securities Commission’s new
Office of the Whistleblower. What is its mission?
The program is primarily an investor protection policy aimed
at serious securities misconduct. This misconduct can be
difficult to detect without the assistance of a knowledgeable
whistleblower. The earlier we know about misconduct, the
more protective orders we can issue, the greater our ability
to minimize harm to investors and, therefore, the stronger
the deterrent message.
We did extensive research on programs in Canada and
around the world, including the Securities and Exchange
Commission’s (SEC) program in the U.S. We then designed
a program specific to Ontario’s needs that not only offers
excellent incentives for whistleblowers to come forward
securities misconduct. and report misconduct, but also offers important protective
measures for them.
Interview by Karen Christensen
A recent SEC study found that 80 per cent of whistle-
blowers reported the misconduct to the SEC after trying
to raise their concerns internally. Why would that be?
As you indicate, a large majority of whistleblowers at-
tempted to report internally first. This indicates to us that

124 / Rotman Management Winter 2018

 One of our goals is to change the culture around
whistleblowing in this country.
companies not only have to focus on how to intake tips — for
instance, through a whistleblowing hotline — but also on how
they deal with the complaints that do come in. Clearly, these
procedures are not as effective as they should be, and the
result is that the whistleblower feels that their concerns have
not been heard.
One of our goals is to change the culture around whis-
tleblowing. We know from our own research that what moti-
vates whistleblowers to report is simple: They want the mis-
conduct to stop. It is very important that there be a tone at
the top that supports and values whistleblowing, and these
individuals need to believe that they can come forward with-
out fear of reprisal. Whistleblowers take personal and pro-
fessional risks by speaking up about misconduct and they’re
only going to do so if they feel they can come forward in a
safe and protected way.
Companies should also look at their board’s involve-
ment in the reporting process and whether employees fully
understand the internal reporting systems in place. Sadly, in
many cases compliance and internal control systems are not
working as effectively as they could.
Does that 80 per cent number reflect what’s happening
in Canada as well?
It’s still early days for our program, so it’s difficult to quan-
tify, but I can tell you that anecdotally, individuals do want
to report and handle these things internally. They want to
stay employed with their employer, and they want the mis-
conduct they have observed to be addressed, so they can
move on.
We don’t require whistleblowers to have reported in-
ternally before they come to the OSC, but we encourage
them to do so. For example, the Whistleblower Award that
we offer is in a range of five to 15 per cent of total sanctions
ordered, where the sanctions exceed one million dollars.
Where a whistleblower lands in that range is based on a
number of factors, but if they reported internally first, be-
fore reporting to us, this would be a positive factor that
could increase the award.
One of your goals is ‘credible deterrence’. What does that
look like?
Just having this robust and highly-visible program at the OSC
has a deterrent impact against securities misconduct. As in-
dicated, if the company is not responsive to their concerns,
whistleblowers know that they have the option to report
to us. This is our first dedicated program within the OSC’s
Enforcement Branch to try to encourage individuals who are
aware of serious securities misconduct to come forward and
report, rather than staying silent. As a result, we have an op-
portunity to address misconduct at an earlier stage.
I also want to mention that, if companies have engaged
in misconduct or misconduct comes to light through their
own internal compliance systems, they can self-report to the
OSC and take advantage of our Credit for Cooperation pro-
gram, if they meet the criteria. We have a very successful
no-contest settlement program that was launched in 2014,
and as a result of it, we have had nine cases resulting in over
$350 million being returned to investors. So self-reporting is
also an option for those who may be concerned that a whis-
tleblower will come to the OSC. Companies are encouraged
to deal with these things on a proactive basis.
Can you describe how a typical misconduct case un-
folds?
Obviously, confidentiality for our whistleblowers is of pri-
mary importance to us, so I can’t get into specifics, but I
can generally describe the process. Whistleblower reports
rotmanmagazine.ca / 125
 Our program has three pillars: A financial incentive
for whistleblowers; confidentiality protections;
and anti-retaliation protections.
are submitted to the program through an online portal at
officeofthewhistleblower.ca. Once submitted, this comes
into our office and all tips are triaged by our highly special-
ized staff. Every single tip that comes in gets vetted by these
experienced people to determine whether there is enough
there for us to pursue an investigation. If the tip is credible,
specific and relates to serious misconduct, it is then referred
to an investigation team. This team then conducts an inves-
tigation and determines whether we proceed with issuing a
statement of allegations.
What type of situation warrants a Whistleblower Award?
We’re looking for cases that involve serious securities
misconduct that are specific, credible and detailed. It’s
not limited to any specific type of misconduct, but we’re
looking at areas of complex securities law, such as insider
trading, market manipulation, accounting irregularities or
corporate disclosures. If the matter results in an admin-
istrative proceeding with sanctions ordered or voluntary
payments made of over one million dollars, an eligible
whistleblower can receive between five and 15 per cent
of the total, up to a maximum of five million dollars. We
think that’s a very powerful incentive for whistleblowers
who may be on the fence about whether or not to report
misconduct.
Talk a bit about some of the whistleblower protections
you have in place.
As indicated, our research shows that whistleblowers are
motivated by a desire for the misconduct to stop. Often, they
want to continue working with their employer, but they’re
frustrated by the circumstances they find themselves in,
and by the company not taking action to address the mis-
conduct. However, they’re also very concerned about the
126 / Rotman Management Winter 2018
potential for retaliation, if they speak up.
I’m pleased to say that we obtained amendments to
the Ontario Securities Act in 2016 to address the issue of
retaliation, via two new provisions. The first makes retali-
ation by an employer against a whistleblower a breach of
Ontario Securities Law. This is important, because it is the
first of its kind in Canada and it sends a strong deterrent
message to employers who might otherwise be considering
taking reprisal action against a whistleblower. It’s impor-
tant to note that this provision applies whether the whistle-
blower reported to the OSC or reported internally through
their company’s internal compliance system. What it means
is, if we find out that an employee whistleblower has been
retaliated against by an employer as a direct result of the
whistleblowing action, we can launch an enforcement ac-
tion against the company.
With respect to the second new provision, we were
concerned about what appeared to be an evolving prac-
tice in the U.S.: Employers were using agreements in such
a way to attempt to silence whistleblowers. It might be a
severance agreement, a termination agreement or a con-
fidentiality agreement, but there would be something in
the agreement to either explicitly or implicitly suggest that
whistleblowers were barred from reporting misconduct to
a regulator or to law enforcement. These provisions were
clearly designed in an attempt to silence whistleblowers.
To get in front of this issue, we obtained a second amend-
ment to the Act, whereby any provision in a confidentiality
or other agreement is void to the extent that it prohibits a
whistleblower from reporting misconduct.
Our program basically has three pillars: The fact
that we offer a financial incentive for whistleblowers; the
confidentiality protections that we offer; and lastly, these
new anti-retaliation protections.
 With respect to confidentiality, we say that when whis- The more people that are aware of the existence of our
tleblowers come forward, we will make every reasonable program, the greater its deterrent impact. We want people to
effort to keep the information they provide confidential. know they have the option of coming to us to report miscon-
We do allow whistleblowers to report to the program anony- duct and that this program is a high priority both within the
mously if they come to us through legal counsel. This is an Enforcement Branch and at the OSC.
advantage for whistleblowers, because while their matter
is being triaged, we don’t really need to know their identity.
Eventually, if the matter goes through investigation and
litigation, we will need to know who the whistleblower is,
but initially, they can come to us anonymously, through a
lawyer.

Do you foresee other jurisdictions adopting this ap-

proach?
As indicated, the SEC program shares some similarities with
our program, but there are also some differences. We’re cer-
tainly the first program of its kind in Canada, and the first
province to offer financial incentives to whistleblowers. I be-
lieve the only other organization in Canada that offers finan-
cial incentives to whistleblowers is the Canada Revenue
Agency, and they do that through their Offshore Tax Infor-
mant Program, which was launched a couple of years ago.
Lots of other regulators around the world are looking to
improve their whistleblower programs and protection, and
we have been asked to share information about how we de-
veloped our program both domestically and internationally.
So, people are looking to us and the successes we’ve had in
these early days.
We certainly view this program as a game changer for
the Ontario Securities Commission. We’ve put a concen-
trated effort behind increasing awareness of the program,
Heidi Franken is the Chief of the OSC’s Office of the Whistleblower
which includes outreach through speaking engagements at
and Deputy Director in the Enforcement Branch. She also oversees
industry events, advertisements for our program in office the Branch’s Case Assessment Unit, as well as three investigation and
elevators, and print and social media ads. litigation teams that specialize in securities-related misconduct.

rotmanmagazine.ca / 127
 FACULTY FOCUS Heather Fraser, Founder, Rotman DesignWorks and Vuka Innovation
Turning Big Ideas
into Business
by Heather M.A. Fraser
ASK ANY LEADER TODAY, and they will tell
you that innovation is a top priority for
their enterprise. In the words of Cisco’s
John Chambers: “Disrupt yourself, or be
disrupted.”
To quote from PwC’s 2017 CEO Sur-
vey report, innovation is the most direct path to keeping an
organization’s offerings fresh and disrupting the status quo.
And as that report notes, innovation thrives when explora-
tion is stimulated, rather than suppressed. Enter Design
Thinking — today’s popular route to exploring new human-
centered offerings.
The concept of Design Thinking is not new — and it
wasn’t invented by design firms. Pioneers like Herbert Si-
mon, Robert McKim and Brian Lawson explored this top-
ic as early as 1969. In the last two decades, Design Think-
ing has been resurgent, popularized by thought leaders like
[former Rotman School Dean] Roger Martin, who advo-
cate Design Thinking as a source of competitive advantage.
At its best, Design Thinking can help you find creative
solutions to virtually any problem; at its worst, it becomes
the ‘fast food of innovation’. Millions of dollars are being
spent on design ‘boot camps’ and simplified playbooks.
While this approach can produce a surge of ideas, in too
128 / Rotman Management Winter 2018
many cases, no one knows what to do with the blizzard of
ideas, and they are left on the shelf — or in an abandoned
pile of sticky notes.
Those who commit to a deeper integration of Design
Thinking into their way of working have realized its true
value. For example, Procter & Gamble has integrated
this approach into its problem solving company-wide, with
hundreds of qualified Design Thinkers throughout the or-
ganization applying it to every challenge imaginable. And
Intuit has established an extensive network of in-house
‘Catalysts’ to ignite new ideas and integrate them into
its disciplined system for ongoing exploration and experi-
mentation.
These companies demonstrate how a commitment to
embedding Design Thinking into the way people think and
work can create a sustainable enterprise-wide capacity for
human-centered exploration and innovation. But Design
Thinking is not enough on its own. Beyond its generative
and experimental aspects, an enterprise needs to be able to
turn ideas into business activity. I call this the discipline of
Business Design — the integration of Design Thinking with
business acumen. Three core principles can help to balance
the widespread appetite for Design Thinking with some
more fundamental business considerations.
PRINCIPLE 1: BUILD A BUSINESS CASE
Translating ideas into strategy, running measured experi-
ments and rigorously integrating data into your decision-
making are critical to making business sense of big ideas,
and building confidence in investments. Let’s examine each
in turn.
TRANSLATE IDEAS INTO STRATEGY. All of the creativity that goes
into the generation of ideas will be wasted if there is no
strategy to deliver and scale new ideas in a sustainable way.
Companies like Apple and Nike have embraced innovation
across the enterprise for decades — in their strategy, systems
and culture at large — and this has been a critical driver of
their success.
Put simply, new possibilities are more likely to be real-
ized if they are strategically aligned with your enterprise’s
purpose and goals. In fact, really big ideas can actually be-
come your strategy, whereas ideas that don’t fit with your
trajectory will likely be orphaned. Designing a strategy for
a new idea entails mapping out where it reinforces your
over-arching strategy, and knowing what it will take to scale
big ideas — the capabilities you will need to invest in, the
measured experiments you will need to run and the man-
agement systems you will need to deliver the ideas to the
marketplace.
RUN MEASURED EXPERIMENTS. Innovation is not risky; not in-
novating is the greater risk. The role of experiments is to
mitigate risk and learn, while gathering evidence to build
confidence in your build-out. We see a lot of popular press
about embracing failure; but is failure really an option? In
the worst case, a tolerance for failure can undermine dis-
cipline, and the importance of staying the course in a mea-
sured way. In my experience, the smartest companies put
an emphasis on learning rather than failing. For example,
Intuit’s systematic approach to experimentation links ear-
ly ideas to market implementation: teams generate ideas
and put them through a disciplined process of measuring
and advancing experiments through NPS [Net Promoter
Score] scoring.
Additionally, while Nespresso created a worldwide
phenomenon with its unique and proprietary coffee sys-
tem and inspired vision, it didn’t get there overnight. Over
many years, it managed risk through hundreds of learning
experiments — from simply putting 100 machines on dis-
play in a local retailer, to bootstrapping its early at-home
expansion through Club Member referrals, to experi-
menting with early café prototypes. All of these experi-
ments informed their decisions and measured scale-ups
along the way to global success — with over 250 stores
around the world, billions in revenue and over 10 million
Club Members.
BE RIGOROUS IN DATA-GATHERING. Of course, there can be no
‘proof ’ for new-to-the-world ideas, but innovation cham-
pions must continuously search for reasons to believe. That
begins with how you frame the size of the opportunity and
ascertain customer opportunities (in terms of unmet needs
and satisfaction gaps), through to running a series of mea-
sured experiments, prototyping alternate business models
and running financial scenarios to optimize your choices.
You will need compelling facts to justify investing in big
ideas. The good news is, most organizations today have
lots of customer, operational and marketplace data at their
fingertips.
There are also many ways to validate qualitative re-
search and ascertain customer appeal. For example, you
might conduct need-finding research to build a case for the
prioritization of investments based on what matters most to
your stakeholders.
PRINCIPLE 2: ENGAGE THE RIGHT PEOPLE
At some point in the pursuit of innovation, someone will
ask: Who is going to make this happen? A deliberate en-
gagement strategy will determine the extent of internal own-
ership and support you can cultivate, the speed at which
ideas work their way through your internal systems and
ultimately, which ideas make their way to market. There
are many stakeholders to consider: the CEO, CFO, busi-
ness unit leaders, development team members across func-
tions, and even external stakeholders who can be important
influencers and enablers. The time to consider how
and when to involve these important players is at the start of
your journey.
rotmanmagazine.ca / 129
 The ‘front line’ in any organization can bring in
critical insights that inform new opportunities.
As you craft your engagement strategy, there are three
important areas to consider.
OUTSOURCING VS. INSOURCING. There was a time when compa-
nies invested heavily in external innovation consultants, but
today, that trend is reversing: More and more organizations
are building out their internal talent base, with a resulting
surge in the hiring of designers of all kinds. For example,
IBM now boasts one of the largest design pools in the world.
Beyond designers, every organization is filled with people
who have insights, imagination and know-how. While ex-
ternal experts can certainly bring big ideas to the table, how
they do so in concert with your internal expertise is critical.
An engagement strategy that taps into your internal talent
will help to boost the odds of big ideas from the outside be-
ing realized.
BUILD OWNERSHIP THROUGH INTERNAL ENGAGEMENT. There is no
better way to motivate smart people than to engage them in
the process of creating a future that they can own. Harnessing
the insights and know-how of people across your organiza-
tion will ensure that they ‘own’ innovative solutions and are
able to bring new ideas to life (vs. blocking them). The first
edition of my book [Design Works: How to Tackle Your Tough-
est Innovation Challenges through Business Design] presented
a case study of a redesign of the chemotherapy patient expe-
rience at Toronto’s renowned Princess Margaret Hospital.
Based on patient need-finding research, a cross-functional
team was engaged in reimagining a total transformation of
the patient experience. This formed the basis of an inspir-
ing architectural brief, and served as a ‘lighthouse vision’
for a major fundraising campaign. In an environment where
there might normally be resistance to change, there was
widespread enthusiasm for the concept of progress, with the
organization owning the vision and working toward realiza-
tion through an inclusive process of iteration and build-out.
AVOID ‘TROPHY LABS’. Internal innovation labs and incubators
have been set up in corporations all over the world, with
great intentions. Unfortunately, they often become ghet-
toized and ineffective in bringing about enterprise-wide in-
novation. I am shocked by the number of executives I meet
130 / Rotman Management Winter 2018
who have either not heard about their own lab or have no
idea what is going on there. A recent article in Forbes by Ten-
dayi Viki (“Five Reasons Your Boss was right to Shut Down
Your Innovation Lab”) presents an alarming trend on the
closing of labs that delivered zero return on investment due
to a lack of strategic alignment, focus, link to business inno-
vation and payout. These ‘Trophy Labs’ might look impres-
sive to investors and media, but too often don’t deliver a re-
turn, because they don’t connect to the rest of the enterprise
and demonstrate a return on investment.
PRINCIPLE 3: CREATE THE CONDITIONS FOR SUCCESS
It takes an entire enterprise to deliver new value. Follow-
ing are three considerations for creating the conditions
for success.
ACTIVATE LEADERSHIP AT ALL LEVELS. Senior leaders guide the
enterprise’s purpose, vision and strategy, while the ‘front
line’ brings in critical insights that can inform new oppor-
tunities. Navigating the path forward requires a disciplined
balance of three things: Managing your present business,
creating your future, and selectively un-learning the past.
I often find that while executive teams are excited by big
ideas, they are slightly overwhelmed by what it will take to
bring the future to life. They have built a highly successful
enterprise, but what is on the horizon might look quite dif-
ferent — particularly in a digital age. That points to the im-
portance of empowering emerging leaders. In my teaching
at the Rotman School, I am always inspired by the insights,
energy and ambition of our students for creating a new
future. As leaders, we have to harness that. The key is to
listen to and empower your emerging leaders. They have
fresh insights into the future, boundless energy, and they
want to make a meaningful impact.
RETHINK SUPPORT SYSTEMS. New ideas need support systems
to ensure a path to market. That means designing how peo-
ple work (organizational teaming and structures), processes
(systems to move ideas through to implementation) and
measurement (e.g., KPIs). In my days at Procter & Gamble,
we had a very sophisticated go-to-market system based on a
volume-based manufacturing model. While the beauty of it
was that you could essentially ‘drop an idea into the hopper’
and it would make its way to the market, it also made it diffi-
cult to ‘bend’ the system to get through ideas that weren’t all
about maximizing capacity. Premium brands like Oil of Olay
and service initiatives like Mr. Clean Car Washes and Tide
Dry Cleaners called for entirely new systems, structures and
measurements of success. Always remember that with new
ideas comes a need to rethink your systems and structures.
goals and leverage your analytical prowess into making a
compelling business case to enhance the ROI on your invest-
ments. Most importantly, it takes an enterprise to deliver in-
novation: Engage your people as extensively as you can to
cultivate ownership, create conditions for success and build
momentum for your innovation journey.

MEASURE AND BUILD YOUR ENTERPRISE READINESS. While orga-

nizations often start their journey by investing in training,
dedicated spaces or innovation teams with special projects,
they must realize that innovation is an enterprise-wide pur-
suit: Sustainable innovation requires strategic intent, proper
structures and systems and, ultimately, enterprise agility.
With today’s tools, your enterprise’s innovation-readi-
ness is something you can measure, diagnose and act upon.
There are a number of profiling tools that gauge how ready
an organization is to deliver innovation, including innova-
tion assessment tools, engagement surveys and organiza-
tional culture surveys. My colleagues at Vuka Innovation
have developed an Innovation Readiness Tool to diagnose
how prepared an organization really is from the standpoint
of strategy, innovation practices, systems and structures,
and culture. However you gauge enterprise readiness, it’s
important to take a holistic view of your business strategy,
everyday mindset and practices, systems and structures and
ultimately, the culture that you aim to cultivate.

In closing
Design Thinking has reignited creativity and reinforced the
important human dimension to innovation in many organi-
zations. Exploring, trying new approaches and learning is
far more important than trying to be perfect right out of the
gate. At the same time, it is helpful to pause and reflect on
how your innovation efforts link to your business more ex-
plicitly, how to engage your organization more broadly, and
how you create the conditions for success.
If you decide to adopt Design Thinking, you will ben- Heather M.A. Fraser is the co-founder of Rotman DesignWorks and
Adjunct Professor at the Rotman School of Management, and the
efit most if you embed it deeply and broadly into your way of
founder of Vuka Innovation. She is the author of Design Works: How
working. Moreover, in keeping with the ideology of Business to Tackle Your Toughest Innovation Challenges Through Business Design
Design, link these efforts more explicitly to your business (Rotman-UTP Publishing 2017, second edition).

rotmanmagazine.ca / 131
 FACULTY FOCUS Mihnea Moldoveanu, Vice Dean, Rotman School of Management
Education 2.0:
The Destructive
Reconstruction
of Higher Learning
AN UNPRECEDENTED — and massively over-
due — wave of innovation in the higher
education industry is about to be un-
leashed, and it will bring unprecedented
disruption to the field.
The waves of digitalization of con-
tent, connectivity and interactions that have disrupted the
media, retail, travel, entertainment, publishing, manufac-
turing and financial industries are about to strike the high-
er education industry, presenting a massive opportunity
for the redesign of a field whose practices have remained
unchanged since the early 1000s.
This is not a typo: Early Renaissance paintings depict-
ing classrooms and historical accounts of learning prac-
tices both indicate that the basic choreography of content,
context, learner-teacher interactions, and structured drill-
ing and quizzing as a prerequisite to certification have not
changed for more than 1,000 years. The lecture-problems-
recitation-exam format — canonized by repeated and un-
questioned practice in early modern Europe and North
America — has formed the basis on which learners are sort-
ed, measured, incentivized, evaluated and ‘taught’.
Remarkably, these practices have persisted in spite of
a century’s worth of empirical evidence — in cognitive and
132 / Rotman Management Winter 2018
applied psychology, in educational practice, and more re-
cently in artificial intelligence — that there are faster, bet-
ter, cheaper ways of helping learners acquire new skills than
those that populate current college and university class-
rooms and labs. Spaced learning, variable-delay reinforce-
ment-based learning, socialized learning, hyper-resolution
feedback, problem-based learning — amongst others —
present modern-day educators with building blocks for the
redesign of the learning experiences of learners in ways that
increase the efficacy and efficiency of both skill acquisition
and skill transfer — i.e. the application of a skill outside of
the context in which it is acquired.
In spite of the accumulating and accelerating evidence
for the sub-optimality of current pedagogical practices, in-
novation in the ~$3 trillion + (2017 USD) higher education
field has been slow, spotty and segregated. The behavioural
blueprints of learning experiences — courses, classes, reci-
tations, tutorials, quizzes, problem sets, essays, exams —
have yet to change in ways that resemble the restructuration
of everyday experiences in the music, retail, publishing,
travel, communications or financial industries.
The explanations usually offered for this painful fac-
toid draw on the macro- and micro-incentives of research-
active academics and departments that use teaching-
The most effective forms of learning are personalized
to the learner, socialized to her learning group,
and contextualized to her work and life.
driven revenue to subsidize research activities whose
outcomes are the ones that ‘count’ and the institutional
forces of research-centric universities that align in the di-
rection of minimizing the logistical unpredictability that
innovation waves trigger. They point to the sociology and
social, cognitive and developmental psychology of homo
academicus — a creature better suited and predisposed to
speaking about a phenomenon (say, innovation, usually
taken to mean innovation in a different field) than to prac-
tising it, to analysis of innovative options rather than to the
prerequisite action and to representing rather than to inter-
vening. Or, they take the ‘tough-mindedly realist’ position
that higher education is a filtering and evaluation process
of students for employers, wherein learning and develop-
ment are desirable but rare and accidental by-products. Of
course, this is precisely the sort of (quasi)-causal explana-
tion whose proliferation causally contributes to the perpet-
uation of the status quo.
In the face of such massive synergistic forces, how
could it not be that the practice of teaching and learning lags
behind insights and empirical findings by a good century?
But, this explanation is both incomplete in factual base
and erroneous in inference. The last 10 years have seen mas-
sive innovation in the field. MIT’s 20-year-old Open Course-
Ware initiative and Stanford’s 30-year-old commitment to
continuous, remote learning have morphed and proliferated
into a massive, open-learning ‘exoskeleton’ which under the
guises of EDX, Coursera and Udacity bring state-of-the-art
content to millions of users while, at the same time, making
it possible for dedicated instructors to learn how to teach
from one another.
Curricular innovation in professional programs — no-
tably schools of business and medicine — has been on the
rise since the early 2000s, responding to new demands for
quintessentially-human and executive skills from ever-
more-savvy recruiters, whose own in-house training pro-
grams have also grown in sophistication and size (witness
a tenfold increase, from 200 to 3,000, of ‘corporate uni-
versities’ between 2004 and 2015).
Responding to the need for contextualized learning
that combines conceptualization and technical skills with
the practical know-how provided by context, leading-edge
Engineering programs — such as the Olin College of En-
gineering — have redesigned their learning vehicles ‘from
scratch’, and from first principles, to maximize on the still-
elusive objective of skill transfer from classroom to ‘life’ —
and the life-world of organizations, in particular.
Alongside positive evidence for curricular and institu-
tional innovation, there is no evidence that course-level in-
novation happens less frequently than does innovation in
any other field — including those considered to be consid-
erably less inert than academia. New techniques for polling
learners, drawing them into the socialized and disciplined
dialogue of the classroom, and making them co-accountable
for the efficiency of the learning production function of their
program are finding their ways into graduate and under-
graduate courses alike. The current and burgeoning wave of
investment in ‘EDTech’ — educational technologies meant
to increase the effectiveness of learning through personal-
ization of content and context — suggests that pedagogical
innovation is alive.
Alive, yes; but, why does all of this innovation not trans-
late into a radical transformation of learning practices across
the field? Why does the industry increasingly appear to live
up to Peter Drucker’s indictment of it as the ‘largest burden
on the backs of taxpayers’, stimulating increasingly-shrill
calls for radical technology-based transformation?
A large part of the answer lies in plain sight. Local, de-
synchronized, segregated innovation needs an open, inte-
grative platform to generate both internal momentum and
an industry-wide transformation. Advances in telecommu-
nications — we are now working on 5G systems — provide
a telling example. Innovations in the physical and medium
access control layers (layers 1 and 2 of the OSI hierarchy)
had been frequent and significant ever since the construc-
tion of the first digital modems in the 1970s. But, until the
rotmanmagazine.ca / 133

IEEE standards and the standard setting process evolved
to the point where innovations from companies large and
small could be synchronized and harmonized into network-
level blueprints for coding and modulation — i.e. until the
IEEE created an innovation platform — we could not even
contemplate sending YouTube videos over handheld de-
vices. What IEEE’s platforms enabled for telecommunica-
tions, open-source repositories and platforms like GitHub
enabled for the development of algorithmic building blocks
that took us from Web 1.0 to the current Web 2.5 — and open
AI initiatives are promising to do for innovations in self-re-
fining algorithms.
In the educational field, the Learning Management
Engine (LME) provides the equivalent innovation platform
that promises to aggregate and integrate across isolated in-
novations in learning and instructional design. It provides a
locus of innovation that allows both learners and instructors
to learn about the best ways to learn, and to teach while at
the same time learning.
A recent, large-scale study jointly undertaken by the
Rotman School of Management and Harvard Business
School has identified the massive gaps in skills learned and
skills transferred that besets the higher education field, show-
ing that the most effective forms of learning are personal-
ized to the learner, socialized to her learning group, and con-
textualized to her work and life environment.
That is precisely what a learner-centric LME will do:
It will allow instructors to collaboratively and interactively
design content and learning experiences adaptive to the
preferences, backgrounds, cognitive and affective styles of
learners, by interfacing to platforms and applications used
in recruitment, admissions and alumnae/i relations that
track learner backgrounds, interests and employment pat-
terns, while at the same time allowing instructors to do quick
A/B testing of content and learning experience designs.
Data analytics — proprietary and closed in current
systems, but open in the learner-centric LME — will allow
134 / Rotman Management Winter 2018
Demystifying Learning Management Engines
LMEs are usually — but opaquely — understood as maps
of users and content, but more productively understood
as networks of functions and decision rights over their
exercise, and as data-generating and data-transfer
processes. In this functionally-oriented picture, user be-
haviours (instructor and learner) within the LME generate
data that is immediately useful in the re-design of the
functional and informational backbone of the platform.
In a learner-centric LME, innovation at the level
of content, module, class, display, interaction and evalu-
ation design can be freely shared between instructors,
departments and universities, while new applications
that enable, enhance and extend learning can be seam-
lessly incorporated into the LME hub.
for continuous tracking of learner profiles and learning-ori-
ented behaviours and learning outcomes, and for in-depth
understanding of what-works-for-whom- and-when when
it comes to the design of learner-instructor and learner-
learner interactions.
Unlike current LMEs, which do not allow for instan-
taneous in-band transfers of data between the core engine
and other learning-enhancing applications, the learner-
centric LME will enable instructors and learners alike to
use and share learning apps in the same learning environ-
ment, thus deepening collaboration among instructors and
programs and tapping into the burgeoning ecosystem of ED
Tech applications that is currently ‘waiting on the sidelines’
and being only sporadically used.
With the flexible allocation of decision rights to learn-
ers and instructors and the free flow of data and content
across programs and schools, a real ‘learning innovation
ecosystem’ will be enabled. Higher education is a densely
and tightly coupled network of activities and tasks, which
include selecting and motivating learners, informing and
testing them, connecting them to instructors, content and
other learners — all while heeding the metronome of the
academic year and program guidelines. If we think of an
 Elements of a Learner-Centric LME
Cooperative learning
enhances the value
of learner-learner
interaction.
PEERS
Impromptu learning:
Guest speakers and
guest content easily
introduced in
courseware. GUESTS
Social learning:
Students engage
mentors for
guidance and
feedback. MENTOR
FIGURE ONE
LME as a network of user behaviours enjoined and engen-
dered — not just web pages and apps — it becomes clear that
its network must have a similar level of complexity to that of
the system it is serving, if it is to function as an innovation
hub in which instructors can learn from one another — and
from their learners.
Learner-centric LMEs will enable a flexible allocation
and re-allocation of decision rights over the learning process:
Whereas current LMEs give the preponderance of authority
over class constitution, allowable content sharing, analyt-
ics, co-horting, apps deployment and interfacing to admin-
istrators and developers, a learner-centric LME will allow
instructors and learners to collaborate in the design of the
learning experience itself, by selecting the additional appli-
cations, data analytics, testing protocols and class designs
that best fit their learning and instructional objectives. Even
without any of the improvements in the learning production
function promised — and likely over-promised — by pun-
dits and gadflies in the ‘new AI’ movement, proven, reliable
techniques like collaborative filtering can be deployed in
the learner-centric LME to produce the social multiplier of
learning efficacy that by now has been amply documented
in empirical research.
Open systems
architecture: Easy
integration of all apps
and platforms in
APPS ecosystems.
Real time analytics: Custom, on
demand insights into how learners
learn best - from what instructors,
on what content, by what method;
ANALYTICS
adaptive to each learner.
Instructors can innovate
instruction design and scale
successful innovation without
INSTRUCTOR admin/design.
Why Are We Not There Yet?
Once articulated, a learner-centric LME seems oddly obvi-
ous as a large piece of the solution to filling the ‘innovation
hole’ of higher education. Why are we not there yet, despite
having par-coursed four generations of learning-manage-
ment systems and engines—and of the ratification of a new
standard (Learning Technologies Interoperability) designed
to assure the very kind of openness to applications and ana-
lytics we currently lack?
A quick look at the evolution of the LMS/LME indus-
try — currently sitting at about US$3.6 billion/year and
projected to grow to $7 billion/year by 2020 — gives us the
requisite hints. The industry is heavily concentrated around
entrenched providers of admin-centric LMS platforms that
are not interoperable, closed to state-of-the-art analytics
engines, and closed to learning applications that are origi-
nating in the Web 2.0+ environment of socialized, network-
based learning.
Although some of them started from open source
platforms (Canvas, Moodle), they developed interstitial
modules for data transfer and interoperability that make
their current instantiations de facto closed, which allows
them to charge universities richly for analytics on their own
rotmanmagazine.ca / 135
 Elements of a Learner-Centric LME

Students
Faculty and Staff Parents

Community

Prospects Billing Alumni

Recruiting and
Admissions
Enrollment Courses

Portal Schedule
Grades Feedback
Integration with
Teamwork Course Work any CRM ensures
complete student
lifecycle analytics.

FIGURE TWO

learner-relevant data sets. And they have succeeded by The success of large scale platforms — like Coursera,
repeatedly and cleverly exploiting the significant asymme- EDX and Microsoft-LinkedIn learning — to bring together
tries of information and technical expertise between uni- learners, instructors and content in open formats point the
versity administrators and academics and their own techni- way to a solution to the ‘innovation gap’ whose implementa-
cal teams. Indeed, academia seems prone to this peculiar tion is imminent.
dynamic:
Academics researchers serve as pro bono reviewers on
articles that appear in journals sold by their publishers back
to universities at astounding margins — a dynamic that new
platform initiatives like Montreal’s Open Neuroscience
have been set up to address.

In closing
It has been said that a problem suitably posed is one that is
three quarters solved. Given the current landscape of inno-
vation, the pressures on universities to deliver a learner skill
base commensurate with the costs of higher education, the
awareness we have of the skills gap and the skills-transfer
gap in education and the availability of a bona fide standard
allowing for the free flow of information and the free inter-
operability of learning and analytics platforms, it seems
that a solution is at hand.
Mihnea Moldoveanu is Desautels Professor of Integrative Thinking,
Professor of Business Economics, Vice Dean of Learning, Innovation
and Executive Programs, Director of the Desautels Centre for Integra-
tive Thinking, Director of the Mind Brain Behaviour Hive and Academic
Director of the Self-Development Laboratory and the Leadership
Development Laboratory at the Rotman School of Management, as
well as Visiting Professor at Harvard Business School. He is Founder,
past CEO and CTO of Redline Communications, Inc. (TSX:RDL), a
leading manufacturer of wireless broadband communications network
and the builder, in 2004, of the world’s first 4G system.

136 / Rotman Management Winter 2018

 Learn from
Each year, the Rotman School of Management
the best hosts almost 100 public talks by bestselling
authors, management executives and other
thought leaders.

Highlights of Winter 2018

January 19, 8:00-9:00am
Speaker: Daniel Pink, Author
Topic: When: The Scientific Secrets of Perfect Timing
(Riverhead, Jan. 9, 2018)
January 31, 12:00-1:00pm
Speaker: Adam Grant, Steinberg Professor of Management
& Professor of Psychology, Wharton; Fellow, Martin Prosperity
Institute at Rotman; Author
Topic: Option B: Facing Adversity, Building Resilience,
and Finding Joy (with Sheryl Sandberg, Knopf, 2017)
March 21 & 22, 8:45am-4:00pm
Are We Ready For The Next Financial Crisis? A Two-Day Rotman
Conference on Causes of the Last Crisis & Lessons Yet To Be Learned
March 22, 5:00-6:00pm
2 Speakers: Chris Clearfield, Principal, System Logic LLC; Co-Author
András Tilcksik, Canada Research Chair in Strategy, Organiza-
tions, & Society & Associate Professor of Strategic Management,
Rotman; Co-Author
Topic: Why Our Systems Fail & What We Can Do About It
(Allen Lane, Mar. 20, 2018)

February 6, 5:00-6:00pm March 27, 5;00-6:00pm

Speaker: Gretchen Rubin, Author
Topic: The Four Tendencies: The Indispensable Personality Profiles
That Reveal How to Make Your Life Better (Harmony, 2017)
February 14, 8:00-9:00am
Speaker: Edward Luce, Chief U.S. Commentator & Columnist,
Financial Times; Author
Topic: The Retreat of Western Liberalism (Atlantic Monthly Press, 2017)
February 26, 8:00-9:00am
Speaker: Cass Sunstein, University Professor, Harvard; Author
Topic: #Republic: Divided Democracy in the Age of Social Media
(Princeton, 2017)
Speaker: Steven Pinker, Harvard College Professor of Psychology,
Harvard; Author
Topic: Enlightenment Now: The Case for Reason, Science, Humanism,
& Progress (Viking, Feb. 27, 2018)
March 28, 5:00-6:00pm
Speaker: Joanne Lipman, Editor in Chief,
USA TODAY Network; Author
Topic: That’s What She Said: What Men Need to Know & Women Need
to Tell Them About Working Together (William Morrow, Feb. 13, 2018)

February 28, 5;30-6:30pm Never Miss an Event

Speaker: Daniel Coyle, Special Advisor, Cleveland Indians; Author Sign up to be notified about upcoming events at
Topic: The Culture Code: The Secrets of Highly Successful Groups rotman.utoronto.ca/events
(Bantam, Jan. 30, 2018)
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