14. From Dinosaurs to Eagles: Four Case Studies – From Incremental to Exponential

FOURTEEN

From Dinosaurs to Eagles: Four Case Studies

CHAPTER SUMMARY: This chapter looks at four case studies of innovative companies: Logitech (the world’s largest maker of computer peripherals); Microsoft (the world’s largest software company); NextEra Energy (the world’s largest generator of renewable energy from the sun and wind); and Walmart—which still faces grave danger from e-commerce behemoth Amazon.com.

Case Study 1:
How Logitech Went from Slow Death to Thriving: Design Focus

Logitech’s CEO, Bracken Darrell, keeps a copy of the legendary designer Dieter Rams’s “Ten Principles for Good Design” on the wall of the conference room next to his open office desk. The German industrial designer is a guru to many of the leading product designers of our time, including Jony Ives of Apple. Darrell, too, believes passionately in the power of design. This belief is what has underlain his execution of a stunning turnaround of his struggling company over the past seven years.

The Logitech that Darrell arrived at in 2012, when he joined as president, was known mostly for cheap computer mice in neutral colors and clunky, forgettable keyboards. The company created products to fit price points and often launched products without significant market testing. At best, the products were uninspired; at worst, they were ugly.

Inspired by Apple as well as by his own experience as President of Procter & Gamble’s Braun division, Darrell resolved to reinvent Logitech “as a design company.” This seemed a tall order for a maker of black mice and keyboards, and he knew that he would need a design leader as his partner and to build a culture of design excellence before he could pair Logitech’s impeccable product engineering and manufacturing with eye-popping design. And that combination, Darrell believed, would turn the company around and make it a lot more exciting to customers, investors, and its own employees.

The alternative was a dark future. Logitech sales had stagnated before Darrell joined. The market for plain PC peripherals was not growing: smartphone and laptop users had no need for them.

Design Principles and Purpose

To effect the transformation, Darrell assigned resources to match his vision. He took two-thirds of the company’s $200 million annual R&D budget away from mice and keyboards and used it to place bets on faster-growing sectors. He recruited a very respected designer who had led design at Nokia: Alastair Curtis. The team, now boasting more than 100 designers, has attracted talent from Nike, IDEO, and other leading companies.

To give this transformation a heart and soul, Darrell and Curtis created design principles that echoed those of Dieter Rams. Logitech’s principles are simple and elegant:

•   Powerful Idea: clarity of purpose and the benefit to the consumer

•   Soul: unique personality of the product/experience

•   Effortless: relentless pursuit of creating friction-free experiences

•   Crafted: simplifying, perfecting, and stripping down to the essential

•   Magical: interactions that are alive and expressive

The idea is not to build products merely to fill a niche, but to build products to fill a need, and to do so in a way that creates emotional resonance and crafts a comfortable, seamless user experience. Having a major unifying idea behind every new product was a powerful way to force designers, marketers, and everyone else working for Logitech to check whether the feature they were designing or the marketing campaign they were planning fitted the unifying idea of the product.

For example, Logitech’s Circle Home security streaming-camera system provides a visual principle—the device is circle-shaped—and a language concerning the circle encompassing our homes, our loved ones, and the places we care about and want to watch. Logitech’s Spotlight Presentation Pointer is designed to help audiences focus on the speaker. Even in products deriving from Logitech’s past, the design teams are striving to add one or two seminal features that improve the lives of their users. On keyboards, for instance, Logitech began adding dials so that people could scroll through menus with their keyboard rather than with an inexact mouse.

Innovation is considered the domain of mathematicians and scientists, and engineering often receives all the focus. But the most important lesson that Steve Jobs taught the tech industry concerned the importance of form. “Design is the fundamental soul of a man-made creation that ends up expressing itself in successive outer layers of the product or service,” he said. This is what Darrell also demonstrated: engineering is assuredly important, but what makes a technology product most successful is its design.

An important myth that Darrell helps shatter concerns the backgrounds of people who can make exponential innovations happen: they don’t need to be geeks and nerds. This too is something on which Steve Jobs held a very strong opinion. “It’s in Apple’s DNA that technology alone is not enough—that it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our heart sing. And nowhere is that more true than in these post-PC devices,” said Jobs at the unveiling of the iPad 2 in March 2011.1 Darrell himself majored in English at a small liberal arts college in Arkansas before completing an MBA at Harvard.

There are other great liberal arts examples: YouTube’s chief executive, Susan Wojcicki, majored in history and literature; Slack’s founder, Stewart Butterfield, in English; Airbnb’s founder, Brian Chesky, in the fine arts; and, in China, Alibaba’s chief executive, Jack Ma, in English. In the new era of converging exponentially advancing technologies, creating the most disruptive solutions often requires a knowledge of fields such as biology, education, health sciences, and human behavior. Tackling today’s greatest social and technological challenges requires the ability to think critically about their human context—something in which humanities graduates happen to be well trained.

Diversifying and Simplifying

The digital-native brands we cited earlier, such as Dollar Shave Club, were the cool kids on the block. They had figured out how to sell directly to customers, bypassing the traditional song and dance of securing distribution and shelf space at a major physical storefront. They played the Amazon merchandising game as if they were born to it, running circles around legacy brands. These digital natives often created market buzz that resonated initially with Millennials and Generation Xers, often expanding then into other demographic age groups. They also tended to refresh products more often and vary their approaches to marketing.

Under Darrell, Logitech accelerated a multi-brand strategy, better utilizing existing assets and, in a few instances, acquiring new ones. Logitech’s UE (Ultimate Ears) brand broke out as a popular Bluetooth speaker brand, winning numerous prestigious awards from audio reviews and tech publications. The company made another key acquisition in 2016 with the purchase of Jaybird, a fast-growing wireless-earbuds company founded by Australian entrepreneur Judd Armstrong. Jaybird had carved out a premium wireless-audio brand with a strong following among athletes and adventure-sports pros. Logitech then went on to acquire two rapidly expanding complementary brands, Blue (microphones) and ASTRO Gaming (gaming headsets).

Darrell’s years at large companies had taught him the good and bad of them. On the positive side, they remained disciplined on cost and invested in sales and marketing. On the negative, they could be stiflingly bureaucratic and slow and could kill off entrepreneurship and innovation as business grew. Darrell kept teams small and independent, to maintain the feeling of a small company, and he flattened the organization, having more than twenty senior managers report to him directly.

Meanwhile, Logitech’s senior managers were clearly signaling that they welcomed speculative ventures that could be moonshots returning 1000 percent on investments. In late 2019, Logitech unveiled a new V.R. stylus, called the Logitech VR Ink Pilot Edition. The stylus is designed to allow people working with V.R. headsets to draw and sculpt shapes in virtual reality. Improving on existing V.R. controllers from HTC and Samsung, the Pilot seamlessly moves between drawing in the air and sketching on a table or any flat surface. It’s not clear what market the product will land in; the demo video shows a Pilot in use in computer-assisted design, implying a future as an expensive professional tool. The Pilot is a salvo into a V.R. market that is still maturing; if it fails, Logitech’s product team will have garnered valuable experience in a field that may be the next consumer-technology bonanza.

Recognizing “People” People

One other practice of Darrell’s that stands the company in good stead is staying in touch with his employees. Review after review on Glassdoor remarks on how he spends time with employees and listens to their points of view.

None of this should be taken as minimizing the company’s struggles in making this transformation. There have been failed products. Reallocating the R&D money resulted in some anger and fear. Middle-level managers struggled to acclimate to the new environment. But the numbers bear Darrell out. Profits have more than quintupled; the company now derives less than 50 percent of its revenues from the sales of keyboards and mice, and it is now a perennial winner of prestigious design awards. Investors have likewise benefited. Share prices have risen by more than 450 percent since their nadir, when Darrell joined.

After five years as CEO, Darrell decided to undertake an exercise of firing himself and assessing whether he would hire himself back. It sounds like a gimmick, but Darrell was seriously considering whether he was the right guy for the job. He decided he was an acceptable candidate after all.

Case Study 2:
From Evil Empire to Cool Kid: Microsoft’s Stunning Cultural Transformation

Every person, organization, and even society reaches a point at which they owe it to themselves to hit refresh—to reenergize, renew, reframe, and rethink their purpose.

Satya Nadella, Hit Refresh:
The Quest to Rediscover Microsoft’s Soul
and Imagine a Better Future for Everyone

When Satya Nadella was named the CEO of Microsoft Corporation, in February 2014, one of his first acts was to ask all the top executives at the famously combative software company to read Marshall Rosenberg’s Nonviolent Communication, a book about how to communicate and collaborate effectively using compassion and understanding rather than competition and judgment.2

With that request, Nadella signaled to the company’s leaders that he wanted to make a big change in the culture of the world’s largest software company. Bill Gates, the company’s longtime CEO, had been known for berating employees. Steve Ballmer, who succeeded Gates, made cringe-worthy YouTube bait with his on-stage screaming and sweaty-faced antics at company product launches. Both endorsed hardball business tactics that competitors feared and admired but customers loathed.

Nadella was cut from a different cloth. Calm, and described by some as beatific, Nadella was born in India and has an enduring love of cricket. He also embraces Buddhist beliefs and has long enjoyed a reputation for calm responses even in the most contentious circumstances and for focusing on positive feedback to reinforce good habits.

Move Fast, Fix Things, Be Nicer

From his first day on the job, Satya Nadella believed that things needed to change, and to change quickly. Microsoft was fading away. It had lost the battle for smartphones. Its primary revenue stream, from software licenses, was perceived as vulnerable as businesses moved away from desktop and server licenses and embraced cloud computing. Linux, the open-source operating system, was set to overtake Windows as the most widely used server operating system. In cloud computing, Amazon was well ahead of both Google Cloud and Microsoft’s fledgling Windows Azure cloud service. Because the desktop- and server-license business lines controlled so much revenue, the company struggled to move talent to much smaller but faster-growing business lines. And the powerful Windows unit internally moved to quash any attempts to usurp its power.

As a result, Microsoft was in big trouble, even if it remained insanely profitable. Ballmer had tripled revenues and doubled profits, but Microsoft’s stock price remained largely flat, a clear signal that investor perception was of a future not all that bright. At its core, this was a problem of lack of innovation, of a company trapped by its reliance on a revenue stream that, though enticing, was sure to fade, coming from a legacy product that was on the wrong side of history.

Nadella recognized this and moved swiftly. A former engineer from Sun Microsystems (a company recognized as a prolific producer of software visionaries), after joining Microsoft in 1992, Nadella had spent time in sales and other management functions and somehow managed to survive and thrive despite a mellow disposition, eventually becoming the executive running the nascent cloud business. As the new C.E.O., he knew that, in order to safeguard the company’s future, he needed to set an entirely new tone for it and revamp its culture to make space for innovation and allow new initiatives to grow and succeed. He believed that central to this would be building empathy—a quality not previously associated with Microsoft.

Nadella made changes both small and large, both symbolic and immediately consequential. In his first public appearance after being named CEO, Nadella said that his company was all about mobile and cloud computing, two fields that were growing very quickly but in which Microsoft was playing second fiddle. He rushed to release the Office productivity suite for iPhones, a move that Microsoft executives had previously blocked out of fear that they would be helping rival Apple and undermining a key motivation for business users to purchase the failing Windows Phones.

More subtly, Nadella began removing the word Windows from conversations. He stopped referring to Microsoft’s cloud as “Windows Azure,” signaling that Azure had its own important product line, distinct from the Windows unit. Then, in late March of 2014, he moved to remove Windows from the cloud product line’s name, making his intentions even clearer. The future of Microsoft did not lie in trying to prop up the Windows dynasty for as long as possible.

Changing Culture

As a manager and a leader, too, Nadella made it clear that the old, aggressive behaviors were no longer welcome. Never raising his voice or showing overt anger at employees or executives, Nadella constantly worked to create a more comfortable environment. He never wrote angry emails, and he refused to tolerate anger or yelling in executive meetings. At the same time, he promoted a culture of curiosity and learning. He urged the company’s 120,000+ employees to embrace a “learn-it-all” curiosity, in contrast to what he categorized as Microsoft’s traditional “know-it-all” worldview. In the marathon Friday executive-team meetings, Nadella instituted a regular feature wherein Microsoft researchers would phone in to talk about their innovations—reminding the company’s leaders of the company’s advances and encouraging them to focus on the future rather than maintain the status quo.

In a break from the past, Microsoft no longer publicly touts hated enemies or bugaboos. Tensions remain, naturally: Microsoft regularly clashes with Amazon over matters of the cloud, and Nadella has gently prodded potential customers with the reminder that Amazon may one day try to eat their lunch. For the most part, though, Nadella has focused on burnishing the company’s battered reputation. He has warmly embraced the open-source software community, giving Microsoft a credibility boost among developers, and has shown a willingness to partner with competitors, under the right circumstances. He has struck deals with Salesforce (which competes with Microsoft’s CRM products) and Linux reseller Red Hat (which competes with Microsoft’s Windows Server division) to encourage them and their customers to use Microsoft’s Azure cloud.

More importantly, Nadella has laid out a bold strategy and made bold moves. To begin with, he wrote off the entire Nokia acquisition and halted Microsoft’s smartphone efforts in acknowledgment that it was a lost cause. In 2016, he oversaw the purchase of LinkedIn, the social media network for business executives, and, in 2018, GitHub, the social coding network housing the greatest proportion of the world’s software projects. These are of a pattern: focusing on the future and revenue streams that are complementary to a vision of collaboration and selling cloud-based products and services. Those two purchases contrast with the Nokia purchase, a seemingly desperate attempt to salvage a mobile hardware future and a vision of Windows dominance that did not conform with reality. (Incidentally, both GitHub and LinkedIn are worth considerably more today than what Nadella paid for them.)

Nadella’s clearest and most consequential move, though, came in March 2018, roughly four years after he took over as CEO. In an email to all employees titled “Embracing Our Future: Intelligent Cloud and Intelligent Edge,” Nadella announced that he would split the old Windows Development Group into two separate engineering groups, one called “Experiences and Devices” and the other called “Cloud + A.I. Platform.” This move cemented the company’s commitment to moving away from Windows and putting the bulk of resources into projects fueling innovation rather than stagnation. It was a bold move and one that met with much grumbling from insiders and people on the old Windows teams. But Nadella was certain that this was Microsoft’s best path. In reality, it was the final big step in Nadella’s plan to reorient the company: it left him, and the rest of Microsoft, free to face the future.

The results of Nadella’s efforts have been nothing short of spectacular. The company’s market capitalization has nearly quintupled, from roughly $300 billion at Nadella’s ascension to more than $1.4 trillion as of early 2020, and Microsoft has become the most valuable company in the world, surpassing Apple and Google. Contributing to this market validation are several successes. First, Microsoft has been wildly successful in converting desktop Office and Windows licenses to subscriptions to the Office365 suite of online productivity products, swapping its lucrative license model for an even more lucrative and stable Software-as-a-Service (SaaS) business model.

Next, Microsoft Azure, now in second place to Amazon’s cloud properties, is making steady headway against them, and is enjoying strong growth in sales of a host of more lucrative SaaS offerings, including its CRM and business analytics platforms.

Even the Microsoft Surface tablet has emerged as a quiet market success, taking some of the dominant iPad’s market share.

Finally, amidst all this, sales of Windows operating systems on PCs and of Windows Server continue to grow slowly and remain highly profitable; so pulling revenues away from legacy products with slow development timelines may turn out not to have hurt their sales much after all.

What enabled these dramatic changes was the new culture of humility, acceptance of change, and openness to external ideas. The resulting successes bear out Nadella’s Hit Reset claim “Culture eats strategy for breakfast,” and Microsoft’s reinvention has clearly sown the seeds of further success.

Case Study 3:
Riding the Exponential Curve: NextEra Energy Demonstrates Innovation in a Utility

If it were a country, NextEra Energy, a Florida-based utility, would rank seventh in the world in wind-energy generation. The company is the largest private generator of wind energy on the planet today, with dozens of windfarms dotting the landscapes of Texas, the United States’ Great Plains, and the Pacific Northwest. From humble beginnings as a small local utility in Florida, NextEra Energy became an early pioneer in renewables. It has grown to become the world’s largest electric-utility company by market capitalization. (Disclosure: Vivek has been an occasional adviser to the firm and run a masterclass on exponential innovation with its executives.)

A Toe in the Water

What NextEra Energy perceived and acted on that others did not was the exponential curve of renewable technologies’ progress. The company did exactly as we are advocating in this book: understand the advances in and convergences of technologies and invest accordingly. NextEra’s managers wagered in the early 2000s that the costs of solar- and wind-energy generation would fall dramatically even as the costs of traditional energy sources remained steady or rose. That looked like an enormous opportunity to expand the company’s reach and profits just ahead of the rest of the energy industry. The gamble paid off in spectacular fashion as demand for wind and solar energy took off and prices, as predicted, plummeted.

NextEra’s managers called this its “toe in the water” strategy: an effort to invest in a variety of energy-related areas in order to test its ideas and capabilities. Other areas into which NextEra has expanded include power-transmission cables, battery farms and other installations for storage of renewable energy, and natural-gas pipelines. In all these areas, NextEra has expanded greatly over the past six years.

NextEra took these steps because it foresaw what the energy future would look like and the competitive competencies the company would require. It consistently identified key trends well ahead of market forces. For example, it correctly predicted that shareholder activism would increase demand for renewables in 2017. It also realized that coal plants would come offline sooner than anyone realized and that demand for coal was in steep decline, opening up even more opportunities for renewables. Following the exponential curve of renewable price declines, NextEra correctly predicted that the volume of solar and wind development in the United States would exceed forecasts—as it did, by a factor of five to ten. “The pace of wind and solar development have been consistently underestimated,” company CEO Jim Robo said in his June 2019 investor presentation.

Talent, Consistency, and Foresight

Jim Robo is only the company’s third CEO since 1989. He joined in 2002 as vice president of corporate development and strategy before leading the company’s competitive business and then serving as chief operating officer. Robo came to NextEra Energy after nearly a decade in leadership roles at General Electric. He was, he says, fortunate to have worked for seven people who were—or became—CEOs of Fortune 500 companies, from the legendary Jack Welch to his own immediate predecessor as CEO of NextEra Energy, Lew Hay.

Robo describes a CEO’s main three responsibilities as capital allocation, execution, and talent development. The importance of capital allocation in the electric utility industry is clear; indeed, NextEra Energy is one of the top five U.S. capital investors in any industry. Yet Robo reminds investors that what distinguishes one company from the next is the consistency of their execution and the quality of their talent. On execution, although Robo freely admits that NextEra Energy has made its share of $10 million mistakes, he says that it is thanks to superior execution that the company has avoided the billion-dollar write-offs of many of its peers. As for talent, it’s a topic that investors may raise less than they should, but it’s what Robo credits as a key competitive advantage for NextEra Energy.

The company was also a pioneer in using machine learning and big data to improve maintenance and utility-grid reliability. It began installing smart meters and microgrids to better manage demand in the early 2010s, well before the 2018 and 2019 California wildfires and subsequent outages made better demand management a matter of necessity for all utilities. In a similar vein, NextEra is among the leaders in applying machine learning to utility problems. These can predict problems in the grid and in generation locations—even remote ones, where wind farms are located.

The company deploys a large fleet of drones equipped with advanced cameras and machine-vision software to monitor its facilities for pending problems. All these technologies have led to increases in reliability and significantly reduced outages.

NextEra has also embraced other forward-thinking innovation practices we have outlined in this book. In an annual contest for employee-generated ideas that it calls Project Accelerate, for example, from 2013 to 2019, the company received submissions of 18,000 ideas. It evaluated 11,000 of them, and 5,600 were deemed good enough to merit further exploration. Some of the ideas that NextEra put into practice included improving work processes, automating various data-entry functions, and insourcing certain job functions.

The company consistently cites these contests and participation as the main reason for its ability to report the best operations and maintenance numbers in the entire United States for utilities. Better still, by including employees in the ideation and innovation process, the company has kept its workforce engaged and learning. Turnover is low, and promotion from within is how the company predominantly fills its management ranks.

The company’s shareholders have benefited in a big way: the price of NextEra issues has increased roughly six-fold in the decade since 2010, not including dividend increases. Clearly it pays to dip your toe in the water, try new things, teach your employees—and ride the exponential curves.

Case Study 4:
Walmart: From “Deer in the Headlight” to Credible Competitor

Walmart has been a visionary retailer since its inception. Founded in rural Arkansas in 1962, it is among the world’s few largest retailers, employing globally 2.2 million and with annual revenues exceeding $500 billion. It succeeded because of its maniacal focus on one thing: getting customers the best price on what they want to buy. Walmart’s rise shared many traits with that of Amazon, which came out of nowhere in the mid-1990s and is now feared as a monopoly.

Walmart has long wielded technology to unfair advantage against slower and less advanced competitors. It built its own logistics software and supply chain, down to trucks and satellite networks for communications, and has been ahead of the curve in the complicated arts of understanding how to price products and designing stores to maximize sales. Originally focusing on dry goods, Walmart became the largest grocery and food seller in the United States as well. All along, it focused relentlessly on remaining one step ahead of the competition.

And then Amazon appeared and, through the 2000s and into the early 2010s, came to dominate online shopping and present an existential threat to Walmart. According to one key U.S. Department of Commerce measure, the spring of 2019 marked the first time ever that online sales exceeded offline tallies; present indications are that trend will only accelerate.3

Walmart’s management team has long recognized this threat but struggled to react, its digital sales being an afterthought. Things began to change, however, in the mid-2010s, when Walmart’s president and CEO, Doug McMillon, set out to build a digital mindset across the organization, with a unified view of how Walmart would sell to customers—meaning an expansive view of how the company could tie together stores, applications, and online means to serve customers in ways no one else could.

In short, Walmart wants to emulate Amazon’s best tactics and take even greater advantage of them by using its massive infrastructure and technology base. It is using one of the techniques we advocated earlier in this book: copying the best ideas of industry leaders and improving upon them. Unlike any other retailer, Walmart can play the long game; its huge sales and strong profits allow it to draw as much capital as this exponential transformation may require.

Walmart has put billions of dollars into its technology effort, amassing a large team of developers and constructing the digital connections that allow real-time communications between stores and applications. Walmart’s own payment app attained use by considerable numbers of regular customers, allowing it to create a closer relationship with them. The company also made much of the new code it creates accessible and open source, giving back to the developer community. Its Walmart Labs technologists were prominent contributors to the popular Node.js coding language and created Electrode, a now popular software platform for building lightweight applications.4

Underlying all of this has been a mandate by McMillon to improve the core e-commerce experience. This has entailed accelerating Walmart’s grocery pickup and delivery service, which capitalizes on the world’s largest grocery business and supply chain.

At almost every turn, Walmart is trying to counter Amazon. It rolled out a cheaper version of Amazon Prime’s membership, allowing customers to get the same rapid delivery for an annual price. It opened its e-commerce platform to outside vendors, creating a marketplace that many companies have come to prefer over that of Amazon. It is building a digital-advertising business that allows brands to promote their wares inside its website and applications—competing with one of Amazon’s fastest-growing business lines. It has also attempted to use its widespread store presence to bridge the digital–physical divide, for example, placing pickup towers in stores where customers can collect online purchases quickly and race back to their cars without waiting in line.

These efforts are beginning to pay off. Since mid-2016, Walmart has recorded growth in online sales from quarter to quarter in the double digits.5

And it seems to be getting only more serious. In the spring of 2019, Walmart brought in Suresh Kumar as Chief Technology Officer and Chief Development Officer, sitting on the company’s Executive Committee and reporting directly to McMillon. This elevated digital to the same level as any other C-Suite job, sending a powerful message to the organization that its online presence is as important as any other activity and is to be integrated fully with everything Walmart does. Kumar had worked at Google, Microsoft, and Amazon in senior executive roles. At Amazon, where he had spent 15 years, his last position had been as V.P. of Worldwide Retail Systems and Retail Services. He had headed Amazon’s retail supply chain and inventory management systems.

The transformation has not been without setbacks. Walmart’s $3.3 billion acquisition of online retailer and would-be Amazon-killer Jet.com floundered and did not live up to its promise. Its attempts to integrate digitally native startup retail brands that it acquired, such as Bonobos and ModCloth, failed to obtain customer support. Even so, the big picture looks bright for Walmart, and the company appears to have successfully created a newer, faster, digital version of itself.

As of this writing, Walmart is continuing to gain ground on Amazon quarter after quarter, both in absolute dollars and as a percentage of transactions. Most analysts today view Walmart as the only credible long-term threat to Amazon’s dominance of online sales.