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Costas Markides

Research interest: Corporate entrepreneurship, corporate strategy and disruptive business-model innovation
Qualification: DBA [Harvard 1990], Full Professor
Nationality: Greek-Cypriot
At LBS since: 1990
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For his Phd thesis at Harvard, Clark Gilbert tried to understand why some newspaper companies were successful in responding to the internet while others failed. He found that those companies that viewed the internet as a threat ended up failing in their response. Surprisingly, those that succeeded in their response did not view the internet as an opportunity. Instead, they saw it as both a threat and an opportunity: http://hbswk.hbs.edu/item/2967.html. Doing so allowed them to create the sense of urgency required to generate action but also to approach the task strategically and proactively.

This is just one of the many studies available which show that how we view or frame something can have a big impact on what we do (and how successful we are in our actions). And that is why it makes a big difference how we frame one of the key issues facing the modern corporation, namely: “what is the goal or purpose of the modern corporation?”

One view, proposed by people in Finance is that the purpose of the modern corporation is to maximize shareholder value. Another view, coming primarily from people in Strategy is that the purpose of business is not to maximize shareholder value. Instead, it is to create great products and services that satisfy customers’ needs and in the process improve the state of our world. The argument is that if we focus our attention on creating superb products and services that the world needs, then as a by-product of that, we will also maximize profits. Thus, maximizing profits is not an end in itself—it is a by-product of something else. Look, for example, at Steve Jobs. He is the one CEO that created more value for shareholders than anybody else. Yet, he never once said that his goal is to maximize shareholder value. No. What he aimed to achieve was radical new products that made our life better. As a result, we bought his products. As a result, he made a lot of money.

People in Finance usually respond to such arguments by suggesting that while they accept the need to produce superb products and services, this should not be the focus of the corporation. Instead, it should be a by-product of something else. Specifically,[…]


More than two hundred years ago, a class of 10-year old German students were asked by their teacher to solve a seemingly difficult problem: “If you add all the numbers from 1 to 100, what is the sum total?” Most of us will probably do a search on Google to find the answer to such a problem. But one of those ten year old kids came up with the answer really quick. Instead of adding the numbers linearly (1+2+3+4 and so on), he added them as follows: (1+100 = 101); (2+99 = 101); (3+98 = 101). He quickly realized that he had 50 pairs, each adding up to 101. So the answer is 50 X 101 = 5050. That little kid turned out to be the biggest mathematician that Germany ever produced. His name was Gauss.

The question is: “did Gauss think creatively about his task? Did he innovate?” The answer, obviously, is yes. But why was he so creative? Was it because we asked him to think outside the box or to think creatively? Was it because we asked him to be innovative? Obviously not! The simple answer is that Gauss was creative because in trying to tackle a really difficult task, he quickly realised that he could not do it by using the standard methodology or the standard way of doing things (which was adding the numbers linearly). He therefore questioned the way he was trying to solve the problem. By questioning his methodology, he was able to think of another way (i.e. another methodology) to solve his difficult problem.

This example has immediate applicability in business. We will not get innovation in companies by asking people to be innovative or by encouraging them to think outside the box! What we must do instead is to first give people a really difficult task (say a stretch goal) and then (and more importantly) “sell” it to them to win emotional commitment for it. If they really bought into the goal, they will attempt to achieve it. But they will quickly realise that they cannot achieve such a stretch goal by simply using their old ways of doing business. They will, therefore, begin to question their ways of doing business (like Gauss). Out of this questioning will, hopefully, come new and innovative ways of operating that will allow us to achieve this[…]


Over the last thirty years, we have accumulated a lot of academic evidence on the topic of new market entry.  The most consistent finding is that the majority of firms that attempt to enter a new market (by, in effect, attacking bigger established competitors) fail.  It has been estimated that almost 80% of all entrants fail within ten years.

Yet, without disputing the academic evidence, we all know of examples of companies that entered new markets with great success.  In several instances, not only did the new entrant survive but often managed to emerge as one of the leaders in the industry! IKEA did it in the furniture retail business, Canon in copiers, Bright Horizons in the child care and early education market, Starbucks in coffee, Amazon in bookselling, Southwest, easyJet and Ryanair in the airline industry and Enterprise in the car-rental market. The list could go on!

What explains the success of these outliers?  The evidence points to a simple enough answer: successful attackers do not try to be better than their bigger rivals.  Rather, they actively adopt a different strategy (or business model) and aim to compete by changing the rules of the game in the industry.  Over and over, what we see is that significant shifts in market share and company fortunes took place not by trying to play the game better than the competition but by trying to be different—in a sense, by avoiding head-on competition.  This is what has come to be known as business-model innovation.

Obviously I am not the first person to praise business model innovation and this is not the first time that managers are encouraged to actively seek and exploit a new business model in their industry.  Numerous books have been written and many ideas have been proposed on how firms could innovate in this way.  But here’s the problem.  Despite all the advice and despite the wealth of ideas, it is very rare to find a business-model innovation that originated from an established big company.

Why—despite all the ideas and advice—do big, established firms fail to pioneer new business[…]


Research by Professor George Land (http://www.youtube.com/watch?v=ZfKMq-rYtnc) has shown an alarming decline in our creativity as we go through the educational system.  For example, when a group of 3-5 year olds were tested for divergent thinking (a prerequisite to creativity), about 98% were rated as “genius in creativity”.  The same children were tested again five years later and—alarmingly—the creativity geniuses had fallen to 32% of the sample.  Even worse, when the same kids were tested again five years later when they were teenagers, only 12% were rated as geniuses in creativity.  When a group of adults (over the age of 25) was given the test, only 2% received the “genius” rating.

These are of course depressing statistics and people have used them to argue that there is something fundamentally wrong with our educational system.  For example, Sir Ken Robinson has eloquently argued that instead of promoting our children’s curiosity and sense of adventure, schools tend to encourage conformity and kill creativity.  He has passionately demanded a complete restructuring of the educational systems of the Western world: http://www.youtube.com/watch?v=iG9CE55wbtY

Without disputing the need to re-think our educational systems, I wonder whether there is another way to look at these numbers.  As most of us would agree, there are positive things coming out of our current educational system (along with the negatives).   Thus, we should be careful not to destroy the positives in an attempt to remove the negatives.  There is no sense in throwing the baby out with the bathwater.

Yes, schools teach us to conform.  And yes, this harms our creativity.  But conformity has its benefits as well—for example it makes us better, efficient and law-abiding citizens.  Rather than risk losing all this in an attempt to reclaim our creativity potential, how about if we keep the educational system as is and search for alternative ways to improve our creativity?  For example, Jeff[…]


A well-known principle in Systems Dynamics (otherwise known as “The Butterfly Principle”) is that small changes in the underlying structure of a system could produce dramatic changes in behaviors and outcomes.  A classic example of this principle is provided by the redesign of the prison system in Norway.  Consider the following story originally published in Time magazine in 2010 [William Lee Adams: “Norway Builds the world’s most humane prison,” Time, May 10th, 2010]:

By the time the trumpets sound, the candles have been lit and the salmon platters garnished. Harald V, King of Norway, enters the room, and 200 guests stand to greet him. Then a chorus of 30 men and women, each wearing a blue police uniform, launches into a spirited rendition of “We Are the World.” This isn’t cabaret night at Oslo’s Royal Palace. It’s a gala to inaugurate Halden Fengsel, Norway’s newest prison.

Ten years and 1.5 billion Norwegian kroner ($252 million) in the making, Halden is spread over 75 acres (30 hectares) of gently sloping forest in southeastern Norway. The facility boasts amenities like a sound studio, jogging trails and a freestanding two-bedroom house where inmates can host their families during overnight visits. Unlike many American prisons, the air isn’t tinged with the smell of sweat and urine. Instead, the scent of orange sorbet emanates from the “kitchen laboratory” where inmates take cooking courses. “In the Norwegian prison system, there’s a focus on human rights and respect,” says Are Hoidal, the prison’s governor. “We don’t see any of this as unusual.”

Halden, Norway’s second largest prison, with a capacity of 252 inmates, opened on April 8 [2010]. It embodies the guiding principles of the country’s penal system: that repressive prisons do not work and that treating prisoners humanely boosts their chances of reintegrating into society. “When they arrive, many of them are in bad shape,”[…]


I recently read a very interesting story in a US newspaper that exemplifies better than any other story the problem with linear thinking.  This is our tendency to immediately look for a reason to a problem rather than look at the problem as the result of many interconnected reasons.  Focusing on one reason rather than the underlying structure of interconnected reasons is what creates unintended consequences in our attempts to solve the problem.  Consider the tragic (and comical) unintended consequences produced by police efforts in Oregon to wage war on the production of drugs in that state[1]:

[In 2007], amid much self-congratulatory hoopla, Oregon adopted the most stringent anti-meth laws in the nation – eliminating key ingredients for local meth cooks and kick-starting a national, even global war on what many consider the most addictive and disturbing illegal narcotic.

Today, it’s undeniable that Oregon’s laws were hugely successful in one area: The meth labs that endangered children and created hidden toxic waste dumps in basements and backyards across the state have been all but eliminated.

As [police] officers indicate, however, that success has borne unintended consequences – thanks to a massive influx of meth supplied by Mexican drug cartels.

Interviews with numerous local law enforcement officials and several meth addiction counselors – as well as a pending federal meth case investigated by the Community Newspaper’s news partner, Fox 12 News – suggest that Oregon’s legislative changes contributed to a radical transformation in the underground meth economy, one that in some ways is making the problem even more difficult to fight.

“The labs are gone, but there’s more meth,” said a longtime Portland Police Bureau drug cop, Sgt. Brian Schmautz, who stressed that he was only speaking for himself, not the agency.

“I’m not saying (Oregon’s meth laws are) not a good thing,” he said. “But we shouldn’t be fooled and say we have less meth, or less meth-related crime.”

[…]


There is growing concern within the Academy of Management that a big and growing gap exists between management research and practice.  According to many, this gap exists because academics undertake elaborate and rigorous research which is not particularly relevant to managers.  Critics go as far as to argue that business schools have lost their way in the last thirty years by focusing too much on doing “scientific” research that has no real practical value.

The persistence of this gap is a mystery!  Over the last twenty years, literally hundreds of ideas have been proposed to close it. Yet, nothing seems to work and according to some, the gap continues to grow.  Why is that?  Is it that all the ideas proposed are bad or are we simply guilty of not implementing our own ideas in a manifestation of the “knowledge-doing gap” disease?

I’d like to propose that the dissatisfaction exists for another reason.  It’s not that our research is of little relevance.  Rather, the dissatisfaction exists because our research is not useful—or more precisely, it is not presented in a form that some (not all) of our customers (i.e. the managers) find useful.  Thus, the gap that exists is not between rigorous and relevant research; it’s between relevant and useful knowledge.  We produce lots and lots of relevant research but somehow this research does not get “translated” into a useful end product.

The reason for this is that academic research—by design—produces incremental additions to the existing body of knowledge.  That’s what we do and rightly so.  Now, let’s assume for the sake of simplicity that this incremental addition is actually relevant to managers or has been “translated” into managerial language.  The question is: Even if it is relevant, is this what managers want from us?  Is this what they find useful?

The answer is no.  What managers want is a holistic answer to a problem they have—and this would never come from a single[…]


The dealing of drugs in the inner cities is a big problem.  One radical idea on how to tackle this problem was proposed by David Kennedy.  Despite having no background or knowledge in criminology—he studied Philosophy at Swarthmore—Kennedy is credited as the only person to come up with a consistently viable and cost-effective strategy for helping inner cities deal with the problem of drugs.

What is his big idea?  As reported in a story in Newsweek on January 31, 2009, Kennedy started out with the basic premise that you cannot solve this problem without getting the local community to help.  And to get the local community to help, you have to earn their trust.  To achieve this, you have to demonstrate to them through actions (and over time) that you really want to help them and that you have their interests at heart.   Thus, rather than go after young drug dealers with the intention of arresting them, how about helping them to get out of drugs?

In a 2004 experiment in High Point, North Carolina, Kennedy got the police to round up young drugs dealers and showed them videos of them dealing drugs.  The police told them that they have readied cases against them and that they are all set for indictment.  But instead of proceeding with indictment, they let these young dope dealers go back home.  They then worked with their families to help them get job training and new jobs.  The message, which spread quickly through the neighborhood, was that the cops were not out for arrests.  Instead, they really want to help by giving kids a second chance—but would get aggressive if they didn’t take it.  Over time, the police won the local community’s trust and cooperation.  The kids themselves began pointing out the big drug dealers in the area and this led to their arrest.  According to Newsweek: “After four years, police in High Point had wiped the drug dealers off the corner. They compared the numbers to the prior four years and found a 57 percent drop in violent crime in the targeted area”

Stories like Kennedy’s[…]


Most of you probably never heard of Hans Monderman.  Yet, the late Dutch traffic engineer (who died in 2008) is credited with revolutionizing our thinking on road design and safety.  He pioneered the concept of the “naked street” by removing all the things that were supposed to make roads safe—traffic lights, road markings and road signs.  In their place, he introduced an open and even space that pedestrians and drivers were supposed to “share”.  He introduced art to signal traffic flow—for example, the height of water fountains was used to indicate how congested an intersection was.  Instead of raised curbs, he used different texture and color to denote sidewalks. He used lights to illuminate not only the roadbed but also the pedestrian areas. He extended cafs to the edge of the street to further reinforce the idea of shared space.  And he removed all street signs, encouraging people to negotiate right-of-way by human interaction and eye contact.  For more than twenty years, he worked tirelessly to prove that such “naked” roads are safer than roads full of signs and markings.

 

His ideas received the expected resistance from his fellow engineers.  But through patience, persistence and constant experimentation, he got people to slowly accept his radical proposals.  In a famous experiment, he totally redesigned a roundabout (traffic circle) in the town of Drachten, Netherlands by removing all traffic signs, eliminating curbs and installing art.  The result was that traffic accidents all but disappeared.  In another experiment in West Palm Beach, Florida, the roads were made smaller and narrower.  As a result, traffic slowed so much that people felt safe to walk there.  This led to increase in pedestrian traffic that attracted new shops and apartment building.  Property values doubled.  Initially vilified as a dangerous maverick, Monderman soon became a traffic engineer “pioneer”.  More than 100 shared space schemes have been introduced in his native Friesland, and in Groningen and Drenthe provinces and his ideas have been implemented in several European countries as well as the USA, Canada, Russia, South Africa,[…]


The world is facing some serious strategic problems—such as climate change, persistent poverty and inequality, the failure of financial systems, environmental degradation, the impeding exhaustion of cheap minerals and oil and so on.   We all agree that we need to take urgent action to solve these problems.  Most of us will naturally assume that it is the job of our elected politicians and governments to solve such complex and global problems.  Surely the task is too large and too difficult for anybody other than government to undertake?  Unfortunately the recent track record of government-led initiatives should not fill us with confidence that the task can be accomplished through public policy alone.

 

As a business school academic, I have often marvelled at the power of human creativity and entrepreneurship in the business sector to create enormous value and improve our world.  I see no reason why the same ingenuity cannot be applied to social problems and I see no reason why the same individual passion, drive and entrepreneurship cannot be channelled to solving social problems.   The question, therefore, that we must address is: “how can normal, ordinary people—folks like you and me—change complex and entrenched systems (such as the education system or the health care system) in ways that solve (or at least improve) some of the big problems plaguing our society?” 

 

To begin to answer this question, I believe we need to consider that social problems differ from other kinds of problems in three subtle ways.  These differences make them unique.  As a result, they require a different change process from what we normally advise people on.

 

  • First, social problems tend to be complex beasts.  They are the natural outcomes of entrenched systems that are made up of numerous interdependent actors, all behaving according to their own interests.  These systems have developed over long      periods of time and are not only firmly ingrained in our cultures but also protected by strong vested interests. Changing them is next to impossible.  Therefore, unlike books on change that emphasize
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