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

John Hagel III

Here is an excerpt from an article about John  Hagel III featured by the Knowledge@Wharton website, sponsored by Wharton School of the University of Pennsylvania.

To read the complete article, download/or listen to the audio, check out all the other free Wharton resources, and subscribe for Knowledge@Wharton email updates, please click here.

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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-20th 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-20th Century.

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To read the complete article, download/or listen to the audio, and check out all the other free Wharton resources, please click here.




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