Running Faster, Falling Behind: John Hagel III on How American Business Can Catch Up

American companies will continue to fall behind their counterparts in emerging markets such as China or India unless they move toward what Deloitte's John Hagel III calls "the edge," which is where passionate, change-driven employees collaborate with others on the kind of innovations that prevent a company from seeing its core business model slowly erode. During a talk at the recent Wharton Leadership Conference, Hagel discussed how CEOs can look to sources such as the online game World of Warcraft for inspiration in finding a successful path forward.

In the early 2000s, Silicon Valley-based business guru John Hagel III was involved in a high-tech start-up and hired Stephen Gillett, a young man right out of college. Less than a half dozen years later, Gillett was named a senior vice president and chief information officer for Starbucks -- the youngest CIO of a Fortune 500 company at that time.

And Hagel thinks he knows a primary reason for his one-time employee's meteoric rise. Everything that Gillett needed to know, Hagel said, he learned while becoming a guild leader in the popular online game World of Warcraft.

The co-chairman of a tech-oriented strategy center for Deloitte LLP, Hagel told the annual Wharton Leadership Conference that Gillett -- just like other top players on the massive online multi-player game, with an estimated eight million participants -- reached out independently to build a large team of allies that solved complex problems and developed winning strategies.

Guild leaders in World of Warcraft "require a high degree of influence," noted Hagel, a successful author and longtime consultant. "You have to be able to influence and persuade people -- not order them to do things. Ordering people in most of these guilds doesn't get you far."

The look inside World of Warcraft and its relevance for today's complicated business environment was part of a recent research project and book by Hagel and two co-authors -- John Seely Brown and Lang Davison -- that examines how companies re-invent and revive themselves by moving away from secretive, proprietary shops and toward a more open, collaborative business model. Their findings resulted in the recent publication of The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion.

The bottom line, they found, is that American companies will continue to fall behind their counterparts in emerging markets such as China or India unless they move toward what Hagel called "the edge," which is where passionate, change-driven employees collaborate with others on the kind of innovations that prevent a company from seeing its core business model slowly erode. "The only thing that succeeds," Hagel said, "is to take those initiatives on the edge and pull more and more of the core out to those edges -- rather than trying to pull them back in." He asserted that chief executives who stick to the conventional wisdom and cling to secretive proprietary business systems are doomed to fail.

Sustained Erosion

This year's Wharton Leadership Conference -- titled, "Leading in a Recovering (and Even Rebounding) Economy" -- came at a time of increasing focus on corporate executives and the role they play in defining a business's direction, its image and its accountability. The conference was organized by the school's Center for Human Resources, Center for Leadership and Change Management and Wharton Executive Education, in partnership with Deloitte. Hagel heads Deloitte's Center for the Edge, which studies emerging business strategies.

Hagel's more than 30-year career in the business consulting and high-tech industries also included a stint at iconic 1980s video game firm Atari, as well as launching the e-commerce practice at McKinsey. He said the bad news uncovered by his research team was that the erosion of American business leadership was not so much a function of the downturn beginning in 2008 as it was a systemic decline dating as far back as the mid-20^th Century.

In trying to quantify the problems facing American industry, Hagel and his co-authors found little existing data to measure the overall performance of U.S. companies. So they worked up some measurements of their own -- and even they were surprised at what they uncovered. Since 1965, they learned, the return-on-assets for all American firms has eroded by 75%.

"The erosion has been sustained and significant. There is absolutely no evidence of it leveling off, and there is certainly no evidence of it turning around," Hagel noted. Indeed, another measurement showed that survival is also an increasing problem for U.S. corporations. Firms in the Standard & Poor's 500 in 1937 had an average life expectancy of 75 years; a more recent analysis of the S&P 500 showed that the number had dropped to just 15 years. "When I'm in executive boardrooms, I hear the metaphor of 'the Red Queen' and the notion that we have to run faster and faster just to stay in place," Hagel said, referring to the character from Lewis Carroll's Through the Looking-Glass. "I would make the case, based on the analysis that we've done, that the Red Queen is actually an optimistic assessment of our situation, that we are running faster and faster and falling farther and farther behind."

What went wrong? Hagel argued that American companies and their leaders were essentially not prepared for a move away from a corporate model of "knowledge stocks" -- developing a proprietary product breakthrough and then defending that innovative advantage against rival companies for as long as possible -- and toward a more open and collaborative business model that he called "knowledge flows." The problem, he said, is that because of the increasingly global nature of business competition, the value of a major proprietary breakthrough or invention erodes in value much more quickly than in the mid-20^th Century.

But in moving toward an economy based more upon knowledge flows, U.S. CEOs find themselves lagging behind their counterparts in rapidly emerging markets such as India or China, where businesses are much more adept at creating broad networks and finding innovation at "the edge" of their business rather than a proprietary core. "It's basically invisible innovation to most Western executives," Hagel asserted. "Most Western executives, when they go to China and India, are looking at products and technology and saying, 'What's going on?' They're not looking at this kind of institutional innovation so they don't see it -- and I think we need to see it in order to be successful."

Indeed, in searching for examples as they researched The Power of Pull, Hagel and his co-authors looked far outside of traditional American corporations -- at the highly competitive sport of large wave surfing, for example -- to find places where teamwork, collaboration and skill in communication were bringing new heights of invention and success.

One conventional corporation that Hagel praised as an edge-based business is the German software giant SAP. He said the company's longtime CEO, Hasso Plattner, came to a decision that the firm was too hierarchical and too adverse to change; his solution involved buying a rival run by Israeli entrepreneur Shai Agassi. Plattner tasked Agassi with launching a venture called NetWeaver, an integrated technology platform. "Plattner said that [NetWeaver serves a function that is] not part of our core business, but it's a highly speculative new initiative," Hagel noted. "He said [to Agassi], 'I want you to use that product to create a very different set of relationships with our customers and with our third-party-channel partners of various types.' Shai Agassi used that mandate to go out and create this software user developer network which now has two million participants." The network, Hagel said, is currently helping SAP to develop both new products as well as new kinds of business relationships.

In that sense, Hagel thinks the teamwork and communication skills that SAP software designers have been gaining are quite similar to the talents that leaders among the millions of online gamers playing World of Warcraft -- people like Starbucks CIO Gillett -- have also been acquiring. In addition to the leadership qualities involved with becoming the head of a guild and assembling a problem-solving team from previously independent players, World of Warcraft enthusiasts, as noted by Hagel, conduct extensive after-action reviews of their performances as well as that of the leader. In addition, he said that game players typically customize their own dashboards to offer statistics and rate performance in areas they consider critical to their strategy.

Increasing the Perception of Opportunity

However, there's one important quality to success for the 21^st Century business leader that cannot be measured by a dashboard, and that is passion. Hagel said CEOs typically don't understand the kind of passion that is necessary for a collaborative, edge-based emphasis. Ironically, Hagel said that American CEOs do place a premium on passion -- but typically on the wrong type. "They say they want passion and I don't think they're being dishonest or disingenuous," he noted. "They really want passion but what they mean by passion is somebody who will follow instructions passionately [and] work nights, work weekends, to get the job done."

The type of passion that Hagel was describing involved what he called "a questing disposition" -- that is, enthusiasm for pushing the work effort to new experiences and new frontiers, through activities such as attending conferences, meeting players from outside the company for lunch or getting involved in social media. Such workers are rare; Hagel asserted that no industry was composed of more than 20% of these passionate individuals, and the larger the company, the less likely you were to find them. Passionate employees are not always the happiest, he said, as many chafe at the corporate barriers to innovation. In fact, Hagel said he finds that most large American companies discourage passion among their workers. "Passion is extremely unpredictable in a world of 'push,'" he pointed out, referring to the older proprietary business models. "Prediction is everything. Passion is a very dangerous emotion. Passion is something you pursue outside of the workforce -- not in the workplace."

Despite his somewhat pessimistic view of the U.S. business environment, Hagel said he believed that the potential is there for American business leaders and their companies to turn things around -- providing that CEOs understand the pressures that they face are systemic, and not merely caused by the short-term economic downturn. Ultimately, success may mean defining a company in terms of its broader mission, rather than in terms of a specific product or products that it manufactures and it markets, he added. "I believe the opportunity for leadership in this regard is to flip the natural psychological reaction that we have to uncertainty," Hagel said. "All of us, when confronted with uncertainty, tend to magnify risk and discount reward, and that tends to lead us not to act but to stay on the sidelines, hoping that somehow, somewhere things will clarify and then we can move. The role of the leader, in making sense, is to increase the perception of opportunity and to diminish the perception of risk."

This article is provided courtesy of Knowledge@Wharton.