Shiva, the Hindu deity of destruction and regeneration is part of the Hindu trinity. Every corporation needs an incarnation of Shiva as part of its hierarchy to avoid being destroyed like the following corporations were:
· Digital Equipment, Control Data, and Wang were destroyed by PCs led by Microsoft
· Kodak and Polaroid failed due to the advent of digital photography.
Blockbuster lost to Netflix and its twin onslaughts of a new business model and streaming
Sears and Wards, and other retailers lost to the online juggernaut led by Amazon.com.
Here are a few reasons why big corporations fall to emerging ventures:
· Revolutionary innovations create new business models. Most unicorn ventures use a new business model that is enabled by an emerging technology or trend
· New business models are often not easily added to an existing corporate entity because the new model is incompatible with, and mostly cannibalizes, the old
· New business models have no credibility at the start and are disregarded as threats. This often results in corporate leaders mocking the new ventures. Ken Olsen of minicomputer maker DEC called the new PCs (that eventually destroyed his company)”toys.”
· New business models make old business models, assets, and skills obsolete. When the new business models take off, it is often too late for the old corporations to respond. Momentum shifts and the parade moves on. Having a huge array of old assets does not mean much in the new world. Having thousands of retail stores did not help companies like Blockbuster or Sears. In fact, they were millstones around their necks. New business models also make old skills obsolete. New products, and skills in the new business models, allowed entrepreneurs like Gates, Dell and Bezos to beat giants entrenched in the old.
· Most importantly, the new business models in the emerging trends make the old corporate leaders obsolete. Often the ignorance of the 60-something CEO who knows the old business model but not the new, hurts the company. In one of the most ill-fated decisions of all time, IBM’s leadership agreed to use Microsoft’s operating system (OS), thereby making it the PC industry standard and licensed it without exclusivity or an option to acquire Microsoft or the OS (https:// www.pcmag.com/news/the-rise-of-dos-how-microsoft-got-the-ibm-pc-os-contract). This allowed Gates to build the industry leader.
So why don’t corporate leaders react faster and better to beat unicorns? Because they have a conflict of interest. Microsoft was one of the few exceptions. It was in danger of being made obsolete by emerging technologies. But Gates had co-founded Microsoft and knew how to build a unicorn from scratch. He pivoted and built a new unicorn. Most corporate leaders don’t know how to build a new unicorn from scratch.
Corporate leaders have a vested interest, in the form of stock options, to maintain the status quo. Their stock options may become worthless if they start testing alternative business models in the new emerging trend, which may be seen as a threat to their existing business models, earnings, and assets. They may also be fired for crying wolf. They often benefit by not rocking the boat till they retire and sell their shares, or until the threat to their company is evident and the stock sinks.
What should be done to protect the interests of corporate shareholders when shareholders are not ready, willing or able to take on the challenges of building new unicorns in emerging trends?
· Corporations need to be prepared to build competitive ventures in threatening emerging trends. The current model is to wait for Aha when potential is evident, and then seek to acquire potentially dominating ventures. If corporations buy too early, risk is high with jeopardy to corporate careers. By the time dominance is evident, valuation is through the roof.
· Corporations can use Silicon Valley’s early-stage angel capital model to start multiple mutually competing ventures in emerging trends. This strategy can be implemented within the corporate umbrella using small investments rather than trying to pick and fund one potential winner before Aha under the assumption that corporations can pick winners before there is evidence. They cannot except by statistical fluke. Silicon Valley has been very successful not because it guesses accurately or due to its VC infrastructure (although it is key) but because it has some of the emerging finest-trend entrepreneurs and angel investors in the world. Many teams find, finance, and guide their ventures, and VCs fund these potential unicorns after there is proof of potential. Corporations can imitate this angel infrastructure.
· Corporations need to develop their Silicon Valley model outside the existing corporate structure to avoid meddling from corporate leadership. If under the regular corporate structure, CEOs are likely to protect the interests of the existing corporate hierarchy, and their own net worth, at the expense of the shareholders.
· To compete with Silicon Valley, reward like Silicon Valley. Corporations need to compensate the members of their Silicon Valley model like Silicon Valley does if they want to attract unicorn builders and allow comparable wealth creation.
MY TAKE: Are corporate managers incentivized to maintain the corporate status quo even in the face of destructive trends that threaten the corporate future? Maybe, especially if they are not qualified to build unicorns in a competitive emerging trend or if promoting potential unicorns in competitive emerging trends could hurt their corporate stock values (at least in the near term), their net worth, and the loyalty of their team . The result may be that they sacrifice the interests of the shareholders. Corporations need a new structure – a Shiva to destroy and create.
This blog was written in collaboration with Dr. Stav Fainshmidt, Associate Professor of International Business at Ivey Business School, University of Western Ontario.