Knowing When to Reinvent (PDF)

Detecting marketplace “fault lines” is the key to building the case for preemptive change. DAN SAELINGER BY MARK BERTOLINI, DAVID DUNCAN, AND ANDREW WALDECK 90 Harvard Business Review December 2015 KNOWING WHEN TO REINVENT No business survives over the long term without reinventing itself. But know...

Detecting marketplace “fault lines” is the key to building the case for preemptive change. DAN SAELINGER BY MARK BERTOLINI, DAVID DUNCAN, AND ANDREW WALDECK 90 Harvard Business Review December 2015 KNOWING WHEN TO REINVENT No business survives over the long term without reinventing itself. But knowing when to undertake deliberate strategic transformation—when to change a company’s core products or business model—may be the hardest decision a leader faces. This kind of change requires overcoming big obstacles: Employees feel threatened, customers can become confused, investors don’t like unproven strategies. And the risk of failure is high—research conducted by two of us suggests that although more than 80% of executives at large enterprises recognize the need for transformation, only about a third are confident that they can get the job done in five to 10 years. The decision to reinvent is even more difficult when company performance is strong and Wall Street is happy; it’s tempting to take a wait-and-see approach unless evidence clearly shows that industry disruption is imminent. But by then it may be too late, as demonstrated all too well by cautionary cases from Borders and Blockbuster to Compaq and Kodak. So how can a leader know that it’s time to transform a company? We have identified five interrelated “fault lines” that suggest the ground beneath a company is more unstable than it may appear. Executives who can detect these fault lines have early warning of industry upheaval and can prepare and adapt. Just as important, our fault line framework can help executives build a case for change and garner stakeholders’ support. Finally, by identifying gaps between an organization’s current state and where it needs to be to thrive in the future, the framework can inform the vision of how the company must transform, which can be refined once the change is under way. Given the magnitude of disruption required to compel a company to reinvent itself, our fault lines 92 Harvard Business Review December 2015 focus on fundamentals: whether a business is serving the right set of customers and using the right performance metrics, whether it is positioned properly in its ecosystem and is deploying the right business model, and whether its employees and partners have the necessary capabilities. To illustrate how to detect the fault lines, we rely principally on our experience at the health care company Aetna, where one of us (Mark Bertolini) is the CEO and the others have worked as strategic consultants. We also draw on cases from Nestlé, Netflix, Xerox, and Adobe, all of which undertook strategic transformations in the past 15 years. Accompanying the discussion of each fault line is a set of diagnostic questions designed to help leaders recognize impending upheaval while there’s still time to respond. Detecting the Fault Lines at Aetna In 2010, when Bertolini became CEO, Aetna had 22 million medical policyholders, making it the third-largest player in the highly conservative health insurance business. The Fortune 100 company appeared to be in a strong position: It had grown even during the 2008–2009 recession, when millions of people lost their jobs and their employer-provided health insurance, and it was prospering in the wake of the 2010 U.S. Affordable Care Act, which imposed significant industry reforms. By the end of Bertolini’s first year at the helm, Aetna had achieved a 38% surge in year-on-year net income; it seemed impervious to disruption. Yet during a pivotal series of board meetings early in his term, Bertolini began making a case for transforming the company into something beyond a traditional health insurer. He was driven in part by personal experiences—he had suffered a near-fatal ski accident, and his son had been diagnosed with a rare form of cancer—that left him deeply critical of the existing health care system. But he backed up his intuition by telling the board of certain fault lines that indicated a changing future: Despite its profitability, the business of health insurance in its current form would soon disappear, to be replaced by a whole new way of making money that focused on servicing health care’s consumers and providers. If Aetna pursued only small changes, Bertolini argued, it risked either slow decline or disruption from new entrants—but if it transformed to take HBR.ORG Idea in Brief THE PROBLEM No business survives over the long term without reinventing itself. But knowing when it is time to transform is difficult. THE SOLUTION Five interrelated “fault lines” can indicate that the ground beneath a company is unstable. Executives who are able to detect those fault lines have early warning of impending industry upheaval and are better able to prepare and adapt. advantage of new opportunities, it could double its revenue by 2020. As of this writing the transformation program at Aetna is far from complete, and—like that of any ambitious initiative—its success is not guaranteed. Our intention in what follows is not to discuss the specifics of Aetna’s program but to explore each fault line in turn and to explain how the fault line framework helped Bertolini and the Aetna board make the existential choice to reinvent the company just when its profits were soaring. 1 CUSTOMER NEEDS. For most of its 160-year history, Aetna’s customers were mainly large organizations—corporations, governments, universities, and other employers. Typically one person or a small department in each chose the health plan or plans for the entire organization. Thus, one of Aetna’s core competencies was selling plans to those intermediaries, rather than to the ultimate consumers. This turned out to be a major fault line. Benefits managers and policy brokers look for ways to demonstrate value to their organizations—which had come to mean offering employees something “new.” The process inevitably gave rise to policy features that few members used in a given year but that generated higher and higher premiums. It also resulted in one-size-fits-all plans, with individuals unable to choose the coverage that was best for them. Bertolini recognized that the needs of his primary customers—benefits managers—were not as urgent as the needs of the insured. Indeed, catering to those middlemen was backfiring. Employers and consumers alike were starting to actively shop for health care services, and they were growing increasingly sensitive to price. The Affordable Care Act had drawn public attention to the enormous cost of health care THE PRINCIPLES The fault lines focus on the fundamentals: whether the business serves the right customers, uses the right performance metrics, is positioned properly in its industry, deploys the right business model, and has employees and partners who possess the required capabilities. in the United States and its impact on the global competitiveness of U.S. firms. Employers had begun to shift health care costs to their employees, offering plans with high deductibles and out-of-pocket expenses at the point of care. And just as they were beginning to shoulder those expenses, consumers were becoming empowered by access to medical information through technologies such as Google and WebMD. It all added up to an awakening in which consumers sought more control over the design and cost of their health plans. To remain a major player, Bertolini realized, Aetna would have to develop products and services that directly targeted the affordability needs of end consumers. This was the heart of the powerful case for transformation. It required a strategic shift over time from being strictly a B2B company to becoming a B2C company as well—one that could help consumers make informed decisions about their health and their health plans. Because of its narrow focus on its traditional customers, Aetna had become disconnected from the most urgent needs of its true customers—such as the ability of individuals to buy the right health plans for their situations and the ability of hospitals, clinics, and other providers to offer higher-quality, lower-cost care. Aetna is not the only company to recognize a fault line between the needs of today’s customers and those of tomorrow’s. A similar awareness drove Nestlé’s decision to change direction in the early 2000s. In 1997 the Switzerland-based multinational was the world’s largest food company, with 70% of its revenue coming from its core segments of beverages, milk products, and chocolate and confections. Yet CEO Peter Brabeck-Letmathe was concerned about the sustainability of the company’s core strategy at a time when consumer behaviors were rapidly changing. As people embraced more-healthful food December 2015 Harvard Business Review 93 KNOWING WHEN TO REINVENT and lifestyle choices, he and his team came to believe that Nestlé was in danger of underserving future customers. As he described it to shareholders, partners, employees, and other stakeholders, the company “made the strategic decision to transform itself from a successful food and beverages company into an R&Dand marketing-driven nutrition, health, and wellness group.” That meant identifying specific health and wellness needs and developing products and brands to meet them. Fifteen years later Nestlé’s traditional core segments account for just 47% of revenue, while the powerful new focus on the future consumer has allowed the company to continue growing. When an industry reaches an inflection point, old ways of measuring success can lead to a sharp decline— or failure. DIAGNOSTIC To discover if you have a customer fault line, talk to 10 customers in each of three categories: your most profitable customers, your least profitable ones, and those you don’t currently serve. Don’t ask for feedback about your company; instead, try to discover the functional, social, and emotional needs each group seeks to have fulfilled, along with the frustrations they feel when doing so. The following questions can help guide you: What are the top unmet needs of each group of customers? Do they vary across different types of customers (in Aetna’s case, benefits managers, hospitals, and individual consumers)? 94 Harvard Business Review December 2015 Do customers we don’t currently serve have emerging unmet needs? If so, does that signal an opportunity that a new competitor could seize? Are our customers loyal to our product, or are they captive for lack of other options? Would they defect if they could? If we are a B2B company, do the needs of our business customers conflict with those of end consumers? Could emerging technology simplify how end users’ needs are met? 2 PERFORMANCE METRICS. When an industry reaches an inflection point, old metrics can prove deceptive—and are sometimes dangerous. Once-reliable ways of measuring success can lead to a sharp decline or even failure, although your short-term results may be healthy. Aetna’s main performance metric had long been the degree of choice in policies offered to employers and institutions. Benefits managers sought the largest physician and hospital networks possible within a given cost range, so as to minimize complaints from employees that the doctors and facilities they wanted weren’t covered. In this context, “innovation” meant giving consumers a wider range of providers and giving companies broader options for structuring benefits. When Aetna recognized that its most important customer might soon be changing, it naturally saw that its way of measuring the value of its products and services would also need to change. Bertolini’s personal experience navigating health care confirmed his suspicion that Aetna’s primary performance indicators were not adequately connected to the needs of end users. Although the system offered lots of choice, it was impersonal, convoluted, and costly. No one coordinated individual patient care to monitor quality and eliminate unnecessary tests and visits. As costs kept rising and premium hikes kept getting passed on to employees, Aetna realized that the industry needed to start measuring value as a function of three factors, adopting what one nonprofit advocacy group termed “the triple aim”: improving the experience of care, improving the health of populations, and reducing costs. That was KNOWING WHEN TO REINVENT the definition of value that would matter most to future customers. The shift toward delivering on the triple aim required new ways of measuring the business. For decades Aetna had focused on acquiring new members to build its customer base and lower its risk exposure, but in the new world of health care, retaining customers would be more important. With more consistency in the customers they served, providers could better prevent illness through holistic programs and better manage care by coordinating services over time and across various clinical settings. Metrics such as customer acquisition targets needed to be superseded by customer retention targets to give investments in prevention and wellness time to pay off for both employers and providers. To confirm that the triple aim should be its new North Star, Bertolini turned Aetna into a laboratory. He made a variety of wellness programs available in-house to Aetna’s 50,000 employees, including fitness centers, healthful meals, and alternative healing methods such as yoga, meditation, mindfulness training, and massage therapy. He believed that this would reduce the company’s overall health care costs and lead to a happier, healthier workforce. Subsequent surveys revealed a 28% decrease in employees’ stress levels, a 20% improvement in sleep quality, and a 19% reduction in pain. Health care costs dropped and productivity increased. These types of metrics were one way Aetna would start to measure success with its B2B customers— and they would increasingly form the primary basis of competition in the industry. Other companies have similarly recognized that traditional metrics were leading them astray. By 2008 the Silicon Valley software giant Adobe—the FINDING STABLE GROUND When leaders spot fault lines early, they can preempt disruption. Here’s how five companies adapted to impending upheaval. FAULT LINE Customer Needs Performance Metrics Industry Position Business Model Talent and Capabilities Nestlé Adobe Xerox Netflix Aetna In 1997 Nestlé was the world’s largest food company. But consumers wanted morehealthful options. In 2008 Adobe measured success by how many software packages it licensed, but its customers cared more about web traffic and revenue. In 2001 the office equipment industry was under siege from Asian competitors and intermediary group-purchasing organizations. In the late 2000s streaming content threatened to make Netflix’s mail-order DVD rental service obsolete. In 2010 Aetna identified talent as its biggest risk—not just finding people with the right skills but also cultivating employees with the courage to step into something new and uncertain. Nestlé transformed itself into an R&Dand marketingdriven nutrition, health, and wellness company. Adobe switched its primary metric of success to subscriptions and renewals for its new cloudbased services. Xerox lessened its dependence on office hardware and began offering business process outsourcing services. Netflix changed emphasis, and by 2013 it became the world’s leading streamingcontent company. Aetna launched an internal start-up in Denver and Silicon Valley—places where it could find employees with the skills and attitude to disrupt its traditional business. COMPANY CONTEXT STRATEGIC SHIFT 96 Harvard Business Review December 2015 HBR.ORG Just because your current business model is widely used and profitable doesn’t mean it will serve you well in the future. creator of Photoshop and Illustrator—had become the world’s second-largest desktop-applications company, after Microsoft. But following a series of blue-sky strategy sessions, CEO Shantanu Narayen and his senior team concluded that the company needed to move beyond desktop software and even beyond its core mission of serving creative professionals developing content. During its first 25 years Adobe measured success by how many copies of software packages it licensed. But its customers wanted results such as increased web traffic and revenue, not just beautiful documents. Recognizing the disconnect, Narayen decided to divide the company’s products into two sets of cloud services. Adobe’s core group, digital media, offered 19 programs in a set called Creative Cloud, available for $50 a month with a one-year contract. A new group, digital marketing, offered eight categories of programs and apps packaged together as a subscription service called Marketing Cloud. After making the change, Adobe needed a way to tell whether it was working. The key metric became monthly and annual subscriptions—sign-ups and renewals—rather than package sales, and it showed that both business units were delivering the desired results. The company had successfully shifted from focusing on products to building long-term relationships—a change inspired by identifying a fault line. DIAGNOSTIC To ensure that you are using the correct performance measurements, hold a cross-functional internal working session in which you examine whether your metrics are consistent with the things your customers value most. Don’t be afraid to challenge the logic underlying each metric. Use these questions to guide your analysis: Do we understand what our customers really value? How well does the performance of our product or service match the customer’s definition of value? Will the customers of tomorrow define quality differently from the way today’s customers do? How closely do our customer satisfaction and financial metrics correlate? Are our customer satisfaction scores as strong as our financial indicators? Are we measuring units and volumes, or outcomes? If outcomes, are we measuring ones that matter to our customers, or ones that matter to us? Do our products or services have more features or complexity than most of our customers value? Is there a new metric that aligns with the needs of future customers? 3 INDUSTRY POSITION. Companies that start out serving niches often expand to encompass more and more tasks. If others are moving into your space at lower cost, it could signal the third fault line. In other words, watch out for players that are beginning to do what you do. Aetna faced disruption in its core business on two fronts. The first was from public and private health exchanges, which were central to the Affordable Care Act. These digital marketplaces allowed benefits consultants and other third parties to redefine how employers and employees shopped for health insurance—including what products would be listed on websites and how information would be displayed. Benefits consultancies such as Towers Watson and Aon Hewitt had become multibillion-dollar businesses by helping employers and employees navigate health care’s complexities. Now they were building simple exchanges for consumers that directly pitted one health insurer against another. Having once December 2015 Harvard Business Review 97 HBR.ORG been advisers to Aetna’s customers, they suddenly became direct competitors to Aetna. Second, starting in about 2013 Aetna faced disruption from hospital groups and other providers that began taking on one of its historical responsibilities: assuming the financial risk of caring for defined populations of patients. That increased the danger that Aetna and other insurers would be disintermediated and that their raison d’être—matching demand for health care services with supply—would disappear over time. In a similar way, Xerox found its role in its industry’s ecosystem under siege. By the late 1990s Asian competitors including Canon and Ricoh had drastically commoditized the market for copiers and printers. At the same time, big corporate customers had begun to outsource the purchasing and servicing of the machines to small third-party contractors who were focused on saving them money—and that meant attacking Xerox’s margins. In 2001 the new CEO, Anne Mulcahy, and her leadership team decided to launch a transformation effort to lessen the company’s dependence on manufacturing and concentrate instead on offering business process outsourcing services. Xerox would not only manage machines but take over entire corporate functions, ranging from technical support to corporate accounting to customerrelationship management. By assuming a new place in the corporate services ecosystem, it found a new way to grow. Within 15 years the company’s core business had declined, while Xerox Business Services accounted for nearly 60% of revenue. DIAGNOSTIC To determine whether your position in your industry’s ecosystem is risky, scan the periphery— analyzing start-ups, adjacent competitors, and historical partners and suppliers that have the potential to fill existing and emerging customer needs. To make the exercise more tangible, draw up a list of 10 companies that are viable competitors. Consider the following questions: Are regulatory, technological, or other external developments lowering barriers to entry to our industry or changing how our current customers consume our products? Are external forces diminishing the value of our role in the industry? Is a disruptive technology emerging that could significantly change the cost-value equation in a major part of our industry? Are our customers starting to bring our services in-house or to outsource them to someone else? Is our industry expanding to include new kinds of competitors? Is there consolidation among major players—signaling that it’s becoming harder to make money in the traditional way? 4 BUSINESS MODEL. Successful companies are often lulled into complacency by how well their business models have been—and indeed still are—working. But just because your current model is widely used and profitable doesn’t mean it will serve you well in the future. For Aetna, strong financial performance at a time when health care costs were escalating meant that its business model was serving the company but no longer working well for employers or end consumers. The model involved setting policy rates to exceed the cost of claims. This practice—keeping a tight lid on claims while premiums skyrocketed— was at the heart of the frustration directed at health insurers in 2010. Recognition of the first three fault lines led Aetna to seek new ways to generate profits. The company identified two major business-model initiatives. First, it launched a consumer unit at its Hartford, Connecticut, headquarters to start shifting its core business from a B2B to a B2C model. This meant creating direct-to-consumer advertising along with digital distribution systems for new consumer-centric products to be piloted in 2016. Because of out-of-pocket expenses and premium sharing, consumers were already footing the bill for 40% of their health care costs, with employers covering the rest. Anticipating that consumers would soon pay for more than 50%, Aetna decided to create a private-exchange marketplace—something that would provide an experience analogous to shopping on Amazon. The second initiative was directed at providers. Correctly predicting that hospitals and clinics would become increasingly interested in taking on the financial risk of managing the health of groups of patients, Aetna decided that it needed to offer new technology along with traditional actuarial and other risk-management services to health care providers. December 2015 Harvard Business Review 99 KNOWING WHEN TO REINVENT This led to the formation of a new business unit, Healthagen, based not in Hartford but in Denver and Silicon Valley. Its mission was to help providers manage costs and risks while improving the overall health of large populations. Bertolini saw the initiative as a way to become the big data engine—the “Intel Inside”—of the new provider networks. Making a case for preemptive change is always challenging, but it’s even more difficult when the journey will be long-term. In seeking new business-model initiatives, Aetna was hardly alone. Netflix provides a classic example of how a corporation must assess whether it needs to move beyond its core business model—and how tricky the timing can be. In 1997, when Reed Hastings started the company, he designed the business model to leapfrog physical stores such as Blockbuster by providing DVDs through a mail-order subscription service. Despite overwhelming early success, he understood that another upheaval was on the horizon—the shift to streaming content. The streaming business initially looked unattractive because of constraints in bandwidth, consumer resistance, and Hollywood’s recalcitrance about signing new kinds of deals. But Hastings chose to embrace the transformation. As he himself acknowledged, at first it seemed that he had moved too quickly. In 2011, when Netflix announced that it was spinning off its mail-order DVD business to focus on streaming, hundreds of thousands of customers 100 Harvard Business Review December 2015 canceled. Hastings acknowledged the disaster and reversed course, retaining the DVD service and treating the two businesses as equals. Yet Hastings’s speed soon appeared prescient: As Netflix accelerated its transformation to a streaming company and a purveyor of original content, revenue grew, doubling in just three years. Detecting and acting on the fault line too early had almost surely been better than waiting for the business case to become entirely clear. DIAGNOSTIC To see if you’re sitting on a business-model fault line, map your current business model and assess how well it is primed to compete against emerging rivals and to deliver against new performance metrics. (For a discussion of mapping, see “Reinventing Your Business Model,” by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, HBR, December 2008.) Ask yourself: Is at least one emerging competitor in our industry following a different business model—even if at the moment that model looks financially unattractive? Is the way we make money aligned with how value is created for customers? Are customers balking at price increases or added fees? How durable are the key components of our existing business model—things like the customer value proposition, resources and processes, and the profit formula? Are any at risk of being undercut by external forces or new competitors? Will the strategic assumptions that underlie our existing model—assumptions about risk, differentiation, and growth—hold true as our industry changes? 5 TALENT AND CAPABILITIES. It is a best practice for executives to continuously assess what skills, competencies, and organizational structures will be required to succeed in the future. When that future is marked by fault lines, the chance of misalignment is high. We find that the fifth fault line is often different from the others in that it may become apparent only after you have detected the first four. And yet the sense that your human resources are not well configured for the future can HBR.ORG be the decisive indication that your organization is off track. After pondering Aetna’s future and identifying multiple fault lines, Bertolini came to believe that the company’s single biggest risk lay in talent—not just in finding new people with the right skills but also in cultivating employees with the courage to step into something new and uncertain. That’s why Aetna located its technology-focused Healthagen venture in Denver and Silicon Valley rather than in Hartford. In those places it could more easily staff the initiative with employees who were experts not at creating insurance policies but at developing software to manage, deliver, and track patient health. Voicing his belief that Healthagen would be key to Aetna’s transformation, Bertolini said publicly that the initiative “will destroy the insurance industry as we know it.” Nestlé, Adobe, and Xerox went through a similar process, recognizing that they would need new talent to overcome the forces about to shake their industries. At Nestlé, the focus on consumer nutrition and wellness required capabilities in areas as diverse as consumer ethnography, microbiome research, and health economics. So the company boosted R&D spending, opened the Nestlé Nutrition Institute, and began working with a wide network of universities and hiring hundreds of postdoc scientists. Adobe needed to beef up capabilities in the new field of digital marketing in order to deliver on the promise of its Marketing Cloud. And Xerox had to hire thousands of specialists across more than a dozen industries for its business-services venture. In each case the need for new talent and organizational structures was so great that the company decided to make strategic acquisitions a major part of the transformation plan. Do the leaders of our business view talent as their responsibility, or is it relegated to HR? Synthesizing the Shifts into a New Strategy Do we have enough emerging leaders who are excited by the prospect of transformation? The fault line framework augured major disruption for Aetna. But it also suggested how the company might succeed in the future. And because it provided early warning, Bertolini was in a strong position to innovate. Aetna had more than enough capital to invest in the future. More important, in 2010 it and other insurance companies were the only industry players with both the actuarial expertise and the data needed to make money by keeping entire populations healthier at lower cost, which was the key to abandoning the increasingly unpopular health care model that focused on reimbursing often expensive treatments for the unwell. This opened up opportunities to occupy new places in the industry over time. Making a case for preemptive change is challenging under any circumstances, but it’s even more difficult when the journey will be long-term. Reed Hastings may have stumbled when first communicating his vision of transformation at Netflix. But, like the leaders of Nestlé, Adobe, and Xerox, he learned that it takes years to fully communicate such a vision. Their campaigns are still going on today. For Aetna, assessing the fault lines and synthesizing them into a single worldview yielded the clear outlines of a new strategy. Yet only recently has the bulk of the health care sector caught on. In mid-2015 Aetna announced that it would acquire rival health insurer Humana in a $37 billion deal that would keep it among the big three players in its sector. The acquisition would extend Aetna’s traditional footprint. But it was also “a way to accelerate our transformation to a consumer-centric health care company,” Bertolini told investors. Although the process of transformation may be long, the fault line framework can give organizations the clarity to overcome the inevitable speed bumps and roadblocks along the way. It can help leaders frame the challenge, build confidence among senior leaders, and align stakeholders with the case for change—and do so years before the situation becomes so dire that there’s not enough time or capital to execute a new plan.  HBR Reprint R1512G Have our company and industry struggled to attract tech-savvy talent? Mark Bertolini is the CEO of Aetna. David Duncan and Andrew Waldeck are senior partners at Innosight, a growth-strategy consulting firm. DIAGNOSTIC The following questions can help uncover a fault line in your current capabilities and organizational structure: Will we be fulfilling customer needs that require new skills to be brought on board? December 2015 Harvard Business Review 101 ® Professor emeritus, Harvard Business School Associate professor, Lund University Stephen A. Greyser ® arketing Mats Urde What Does Your Corporate Brand Stand For? It's harder to. create astrong identity for an entire company.... than for aproduct. This tool kn can help you get there. · ;:i:!I:t. :1.·.·.·.·.·.·.....................'...... ::::::::::::- IO O O IO...................................... IO I I Io. ' ' ❖::::: · ❖' /1/ustrations by MARK ALLEN MILLER Harvard Business Review January-February 2019 81 marketing Idea in Brief. THE PROBLEM A clear corporate brand identity provides direction and purpose. enhances the standing of products. aids in recruiting and retention, and helps protect a firm's reputation in times of trouble. But many companies struggle to define their brands.. THE TOOL The corporate brand identity matrix can address that problem by guiding execu tive teams through a structured set of questions that examine aspects of identity related to the organiza tion's mission, culture, competences, values. and other defining characteristics. THE APPLICATION Companies in a range of industries have used the matrix to clarify the relationship between parent and daughter brands; support business development; evaluate targets for acquisition; and reposition their brand image. 82 Harva rd Bu si ne ss Review Janu a ry- Feb ruary 2019. Companies are extremely good at defining their product brands. Customers, employees, and other stakeholders know exactly what an iPhone is and means. But organizations are often less sure-footed when it comes to the corporate brand. What does the parent company's name really stand for, and how is it perceived and leveraged in the marketplace and within the company itself? Express Yourself A clear, unified corporate identity can be critical to competitive strategy, as firms like Apple, Philips, and Unilever understand. It serves as a north star, providing direction and purpose. It can also enhance the image of individual products, help firms recruit and retain employees, and provide protection against reputational damage in times of trouble. Many firms, however, struggle to articulate and communicate their brand. Consider the €35 billion Volvo Group, which sells a broad portfolio of trucks, buses, construction equipment, and marine and industrial engines. After its new CEO decentralized the organization, turning its truck brands (Volvo Trucks, Mack Trucks, Renault Trucks, and UD Trucks) into separate units in 2016, questions about the parent company's identity became pressing. Because that identity wasn't well defined, people in the group were uncertain about how they should strategically support the "daughter" brands, and people in the new brand units had trouble understanding how the group's mission, values, and capabilities extended to themand even how to describe their brands' relationships with the Volvo Group in marketing and investor communications. But using a process we'll detail in this article, Volvo was able to clarify its corporate identity and the roles and functions of its daughter brands. That alignment resulted in greater corporate commitment to the brands, sharper positioning in the marketplace, a stronger sense of belonging to the group, and more-coherent marketing and communications. The approach we used to help Volvo achieve this turnaround is the product oflo years of research and engagement with hundreds of senior executives in organizations around the world and across several sectors, including manufacturing, financial services, and nonprofits. At its core is a tool called the corporate brand identity matrix. As we'll show, many companies have adapted this tool to their particular circumstances and used it to successfully define a corporate identity, align its elements, and harness its strengths. INTRODUCING THE MATRIX The framework we've developed guides an executive team through a structured set of questions about the company. Each question focuses on one element of the organization's identity. There are nine elements in total, and in our matrix A visual identity-such as IBM's iconic logo is often considered the essence of a corporate brand's expression, but to us this 1s a narrow interpretation. The expression of a brand also includes attitude or tone of voice (think of Ge1co's gecko), a flagship product (such as Omega's Seamaster watch), taglines (Nike's ''.Just Do It"), and even signature audio clips (MGM's trademarked lion's roar). All these varied forms of brand expression must harmonize. The CEO of an international shipping corporation we know has compared a corporate brand to a work of music, emphasizing that its "melody" must be recognizable in all internal and external communications. His favorite song, "My Way," he explained to us, had been performed by Frank Sinatra, the French star Claude Fran, 'o_.,, THE SECOND DIAGONAL PATH FOCUSES ON COMPETITION: THE FIRST DIAGONAL PATH FOCUSES ON STRATEGY: Our mission is _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ Our competences are _ _ _ _ _ _ _ _ _ _ _ __ _ _ Our vision is _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ What we promise is _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ What we promise is _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ Our core values are _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ Our core values are _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ Our value proposition is _ _ _ _ _ _ _ _ _ _ _ _ __ Our intended position in the market is _ _ _ _ _ _ _ _ __ Do your mission and vision engage and inspire people in your organization and, ideally, beyond it? Do they translate into a promise that the organization will fulfill? Is that promise manifest in the company's positioning? Finally, does the logic a/so flow in the other direction: Does your positioning resonate with your promise and values, which align with the corporate mission and vision? Do the items in the list above fit well together? Do your current competences allow you to keep your promise and provide a solid basis for competitive and appealing value propositions? THE HORIZONTAL PATH FOCUSES ON COMMUNICATION: THE VERTICAL PATH FOCUSES ON INTERACTION: Our culture is Our communication style is _ _ _ _ _ _ _ _ _ _ _ __ What we promise is What we promise is Our core values are _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ Our core values are The kinds of relationships we strive for are Our corporate personality traits are _ _ _ _ _ _ _ _ __ This section reveals how well your organizational values and culture resonate with and engage people inside and outside your company. Employees are your most important resource for ensuring the authenticity of the corporate brand. If they don't embrace these elements ofyour corporate identity, then your outside relationships, whether with customers, partners, or other stakeholders, will suffer. The corporate personality or character underpins the company's brand core and is expressed in myriad ways, from product design and the architecture of the headquarters to the corporate logo and marketing taglines. Assess how well that personality comes through in all communications, both internal and external. Harvard Business Review January-February 2019 89 OC7 AUTHOR ······--------··-·------------------------------------------ ~ PHOTOGRAPHER JOHANNES MAX BRUCKNER Douglas Holt President, Cultural Strategy Group INNOVATION Ibe S8GI8lJO bui ding breaklbrou□ b businesses 10 6 Harvard Business Review September-October 2020 INNOVATION 1 ----------- mLDITWrffK~_T_billi~ationis an imsistible goal. To get a leg u~ any companies now emulate the innovation model perfected in the tech sector. Procter & Gamble, for example, pursues what it calls constructive disruption. The company has designed its innovation process like a start-up's, with a venture lab that pulls in tech entrepreneurs and a lean probe-and-learn prototyping process. That approach is not working. The reality is that in most consumer markets, innovation is a slow, incremental grind-extending master brands, adding a new bell or whistle, tweaking a formula. P&G's star innovations-such as a smart Pampers diaper that signals when a change is needed-aren't exactly threatening to become the next billion-dollar product. And when companies do swing for the fences, they rarely achieve good results. Take Coca-Cola, which has long prioritized building a business in coffee. After years of research and testing, the company bet big on two innovations-Far Coast Coffee (a retail chain premised on sustainability) and CocaCola Bla.K (Coke mixed with coffee). Both ideas failed badly, so the company eventually bought Costa Coffee, a British coffeehouse chain, at a steep price: $5 billion. This problem is not an organizational one. Companies struggle because they put all their chips on one innovation paradigm-what I call better mousetraps. As Ralph Waldo Emerson noted long ago, "Build a better mousetrap, and the world will beat a path to your door:' This is innovation as conceived by engineers and economists-a race to create the killer value proposition. It wins on functionality, convenience, reliability, price, or user experience. Bettermousetraps innovation is often the right bet if you're a tech company. Thousands of experts, seminars, and boot camps provide advice to help you on your way. But what about companies that operate in markets where new technology is less consequential or impossible to defend? For many of them, confronted with a pattern of poor return on investment, chasing better mousetraps seems like an exhausting and expensive matter of running in place. Fortunately, building better mousetraps is not the only way to innovate. In consumer markets, innovation often proceeds according to a logic I call cultural innovation. Think of Starbucks, Patagonia, Jack Daniel's, Ben & Jerry's, and Vitaminwater. Remember, innovation is in the eye of the IDEA IN BRIEF THE CONTEXT Most companies take a "better mousetraps" approach to innovation, improving a product's functionality-with only average results. 108 Harvard Business Review September-October 2020 A DIFFERENT APPROACH A few take a cultural innovation approach instead, first identifying a weakness in the existing category and then reinventing the category's ideology and symbolism. THE RESULTS The Ford Explorer, for example, replaced the boring "mom mobile" minivan as America's favorite family car with a promise of excitement, adventure, and glamour-even though the SUV wasn't a technically superior vehicle. ~~11. ;0 ,,f ' ' ; '.., ' - F,g l!l , , ' I I , ::z::::;;;~~ri~F~~-.::::~ h , · =.,,._..,,,...,., r. 1,;., ~JI ' ".:~~ ~ J.':. " -,., _, ,.:..'· :· -~ ~- -...w 'n:, ·~ ~~~~6- -~ W\±JW~~ ~. , _ -,~.._,_.....,. · ···: · ~ ® :,,:. s ABOUT THE ART Joha nnes Max Bruckner, a German geometer, created and collected polyhedral models. His research, published in 1900, has inspired researchers and artists, including M.C. Escher. ,,.. '. ~ # ~. J I 1r9 1t ·G I I ' ~~ Vil ~:_. :·, ,C--,t-'-~~ :~ ,,: _s I ' +'.J ·:; ♦ ~ 2 2 t.l' c.' · , ,, 19 !ig.'l.i 'ii'-........ 1. beholder. When those brands broke through, consumers viewed them as major innovations, although a better-mousetraps perspective would reject that assessment. In each case people responded to the brand's ideology-a reimagining of the category that transformed the value proposition. Cultural innovations are embodied in distinctive products or services, to be sure, but also in founders' speeches, packaging, ingredients, retail design, media coverage, and even philanthropy. The result? Those brands don't compete in the valueproposition race, trying to lead the category as it's currently defined; they play a different game. Better-mousetraps innovation is guided by quantitative ambitions: Outdo your competitors on existing notions of value. Cultural innovation operates according to qualitative ambitions: Change the understanding of what is considered valuable. I've spent the past 20 years researching and advising organizations on numerous cultural innovations. My work reveals the strategic principles that allow companies to pursue them- principles completely different from those used to build better mousetraps. ,~-....,...,.,..) __..__ FORD REINVENTSTHE FAMILY CAR Buying a sport utility vehicle would have been an oddball idea for American middle-class families as late as 1989, but by 1995 the SUV was their unquestionable favorite, thanks largely to the Explorer- the pioneering vehicle that earned Ford roughly $30 billion in operating profit over its first decade. A spartan enclosed truck, the Explorer was yanked from its traditional role as functional transport on farms and ranches to become the aspirational choice of suburban families for commuting, delivering youngsters to school, and heading out to the mall. It succeeded wildly despite violating the rules of better mousetraps at every tum. It was a classic cultural innovation, targeting a fatal flaw in the family car culture of that era. The modem station wagon was a staple of the postwar nuclear-family ideal. All the major makes and models competed within this culture of suburban functionality. In the 1980s minivans rapidly replaced station wagons, winning on important benefits- plenty of seats, great storage, easy entrance and egress-that allowed families to haul kids and their friends around town and on summer trips. Ha rvard Business Rev iew Se ptember- Octobe r 202 0 109 The Reagan-era revival of America's frontier ideology inspired people to reimagine the family car as aswashbuckling vehicle. INNOVATION The minivan's pragmatic design and ubiquity created a big symbolic problem. Vehicles are judged as much for the identity they project as for function: Status, sophistication, and masculinity all play a role in creating "premium" cars, which at the time were predominantly imports. Minivans came to represent the quotidian life of suburban parents, mocked as the centerpiece of a boring existence organized by "mom mobile" routines. Parents began to yearn for a car that would replace this stigma with an aspirational identity. In the 1980s the Reagan-era revival of America's frontier ideology, which championed rugged individualists taming wild nature, inspired a critical mass ofurban and suburban residents to reimagine the family car as a swashbuckling vehicle for off-road adventures. The offerings at the time were a poor fit for families: The Jeep Cherokee (XJ) and Chevy's massive Suburban were rough-driving trucks that lacked the amentities of passenger cars. The Ford Bronco and the Chevy S-10 Blazer offered only two doors. Nonetheless, many families were willing to forgo the minivan's creature comforts for the symbolic value that trucks bestowed. It took the incumbent automakers the better part of a decade to engage with this opportunity. They were lucky to be in an industry with very high barriers to entry; otherwise they would no doubt have been beaten to market by a challenger brand. Eventually the big three domestic truck players-Ford, General Motors, and Chrysler Jeep-raced to bring a comfortable, luxuriously equipped four-door SUV to market. The winner would be the brand that managed to seduce parents into thinking about family cars in a new way. Jeep had the initial advantage, given its potent off-road pedigree, and its new Grand Cherokee, launched soon after the Explorer, won many plaudits. However, Jeep's idea of a family SUV was a straight take on the frontier-adventure myth, showcasing performance on wilderness outings-a myth better aimed at young single men than at upscale families. The Explorer was launched with advertisements that dramatized a new ideal offamily life, rejecting the dull suburban minivan. Ford made two crucial changes to the frontier-adventure myth, both of which connected powerfully with parents. Instead of Jeep's macho excursions, the company offered a vision of families communing in the wilderness. Ads showed them whisking off to remote places in an Explorer to make memories while gathering under the stars, kids happily trading in their tech for spiritual contentment. And parents who owned an Explorer got to have a life too. Ads showed them escaping on urban adventureseating at boutique restaurants or attending the theater. They might live in the suburbs, but they could still enjoy a cosmopolitan life. Families flocked to the Explorer. Sure, most of the time they were still hauling groceries and dropping kids off at soccer practice, just as they would have done with a minivan. But they were buying into a myth. Driving an Explorer allowed them to feel they'd finally escaped the world of mom mobiles for a more adventurous life. In the postwar era, safety was a modest concern, despite Ralph Nader's best efforts. Even getting people to use seat belts was a challenge. By the early 1990s, though, car safety had captured the public's imagination owing to two big better-mousetraps innovations-airbags and antilock brakes-that were promoted heavily in auto advertising and the media. Ford discovered early on that people believed that the huge size and weight of SUVs made them uniquely safe and that their off-road capabilities meant they were especially skid-resistant in bad weather. So the company crafted a sales pitch to reinforce that perception. The car's elevated seats conferred a feeling of power and invincibility, particularly for women. When couples came to a dealership, the salesperson would ask the woman to test-drive the Explorer so that she could appreciate the feeling of safety from the high perch. Ford was able to persuade customers that they were buying the safest car on the road. The Explorer was a great success, comparable to celebrated Silicon Valley innovations in terms of its market impact and profitability. Yet its breakthrough is incomprehensible when viewed through the lens of better mousetraps. The vehicle was not an engineering advance-quite the opposite. It relied on dated technology. Explorers accelerated lethargically. They were top-heavy and cornered poorly. They cost a lot and were far more expensive to maintain than minivans. And they were gas-guzzlers that generated enormous increases in CO2. But families were willing to pay near-luxury prices because the SUV perfectly addressed the symbolic problem in the market's status quo. Harvard Business Rev iew September-October 2020 111 INNOVATION THE CULTURAL INNOVATION MODEL Let's look at a second case-Blue Buffalo dog food -to recognize the key steps in cultural innovation and to explain why incumbents often fail at it. For decades Nestle Purina, Mars, and Procter & Gamble dominated the profitable U.S. dog food category with powerful brands, distribution muscle, strong R&D, and big marketing budgets. Yet all three were beaten badly by Blue Buffalo, a tiny start-up, which was so successful that General Mills eventually bought it for $8 billion, while Procter & Gamble threw in the towel and sold its entire pet food division to Mars for less than $3 billion. Blue Buffalo bested the established brands by reinventing dog food culture. Here's how. Step 1. Deconstruct the category's culture. Markets are belief systems embraced by those who participate in a category: companies, consumers, and the media. To understand your category's culture, think like a sociologist. Step back and make the familiar strange. What are the category's taken-for-granted organizing principles? What is the dominant ideology? Before Purina launched the modern industrial dog food category, in the 1920s, most American families fed their dogs table scraps. Purina's standardized extruded kibble made inroads with consumers, and by the postwar era the company had adopted the mass-marketing techniques pioneered by food manufacturers such as Kraft and General Mills. Its ads featured heart-tugging images of cute dogs and their loving owners. The implicit message was "Purina is the biggest, best-known dog food company, so of course you can trust us to make food that will keep your dog healthy and energetic:' Ingredients were rarely mentioned. The category's first cultural innovation came in the 1970s, on the heels of media hype about scientific findings that certain vitamins and superfoods could keep people healthy. (Fiber and antioxidants were hot topics.) Cultural innovators, led by Hill's Science Diet and Iams, championed a new, scientific dog food ideology. The companies produced separate products for the various stages of a dog's life. Marketing featured veterinarians announcing cutting-edge formulas based on the best nutritional science. These products were sold in vets' offices-the ultimate sign of medical credibility. Purina launched a fast-follower grocery brand, Purina ONE, 112 Harvard Business Review September-October 2020 with ads featuring scientists in lab coats and packaging full of medical terminology. These new brands taught owners to value dog food primarily for its nutritional benefits and offered them a scientific lexicon that "proved" quality nutrition. They encouraged owners to view the making of pet food as a complex scientific endeavor. The ingredients, however, remained hidden in small print. Step 2. Identify the Achilles' heel. Categories' cultures eventually develop a fatal flaw, and cultural innovators pinpoint the emerging vulnerabilities. Throughout the early 2000s America's industrial-scientific food culture was subject to damning critiques in the media and by dozens of insurgent anti-industrial food movements. Dog owners began to feel similar concerns; they questioned whether those bags of kibble made by big companies were actually good for their pets. Then, in 2007, thousands of dogs and cats died after eating contaminated pet food. The media reported that one ingredient, wheat gluten contaminated with melamine, was bulk-sourced from China. Owners had had no idea that they were feeding their dogs wheat gluten or that it was imported from China. They began to take far more interest in the actual ingredients of dog food. Step 3. Mine the cultural vanguard. Category transformations are usually prefigured by ideas and practices worked out at the margins. When cracks form in a category's culture, a cultural vanguard often appears before big companies show up. Innovators study the vanguard closely, and even participate in it, to find a strategic direction for their challenger ideology and the symbols required to bring it to life. A small "natural" dog food subculture, separate from the national brands, had developed in prior decades. Alternativehealth companies and their avid customers believed that healthful dog food should emulate what dogs ate before they became domesticated. The subculture's brands, which were sold in boutiques and natural-foods stores, were very expensive and marketed to niche customers. They made little effort to win converts from the big industrial-scientific brands. The brands lionized whole ingredients and transparent supply chains. They were all about real meat, poultry, and fish, along with whole-food carbohydrates (sweet potatoes, rice), and they fastidiously avoided anything artificial. The subculture encouraged customers to beware of"fillers" A Cultural Innovation Framework Blue Buffalo upended industry giants like Purina and P&G by reconfiguring the category's ideology, using potent symbols. As a result, it transformed the value proposition for dog food. Challenger dog food culture Conventional dog food culture IDEOLOGY Industrial-scientific nutrition ➔ Trust corporate scientific expertise to formulate nutritious food; don't worry about ingredients ➔ SYMBOLS Ads showing happy dogs with their owners ➔ Nutrition jargon ➔ ➔ "Scientific" claims Big national brands IDEOLOGY Preindustrial ancestral diet Feed your pet the same foods that keep your family healthy ➔ ➔ ➔ CULTURAL DISRUPTION Achilles' heel emerges ➔ Industrial ingredients exposed as a health risk; melamine scare ➔ Am I feeding my dog unhealthful food? ➔ SYMBOLS Ads revealing inferior industrial ingredients ➔ Plain package (no owner+ pet) ➔ Number one ingredient: real meat No fillers, no meat by-products, no artificia l ingredients ➔ LifeSource Bits ➔ ➔ THE VALUE PROPOSITION Health: The most nutritious dog food is made by big corporations with scientific expertise Identity: I'm a caring owner who buys the best food for my dog's hea lth CULTURAL VANGUARD ➔ Natural-foods subculture (processed starches such as corn, wheat, and soy) and meat by-products. Their packaging highlighted ingredients rather than happy dogs and loving owners. Step 4. Create an ideology that challenges the Achilles' heel. Cultural innovators source materials from the vanguard to build a new brand concept. The natural-foods subculture's ideology was hidden: Alternative-health zealots talked to one another and used rhetoric aimed at the already converted. Blue Buffalo, which was founded in 2002 by a Connecticut family that had become obsessed with the link between pet diet and health after their Airedale terrier (named Blue) died of cancer, acted as the subculture's proselytizer. The brand challenged the weak assumption that anchored the industrial-scientific ideology-that kibble was surely nutritious, even though owners had no idea what the compressed brown pellets were made from. In doing so, it created a litmus test for responsible dog ownership. Blue Buffalo pushed owners to evaluate dog food as food. Those other kibble brands were full of industrial products that pet owners would never eat. People needed to take control and make sure their dog food contained healthful ingredients, no different from what they'd feed their families. Blue Small family company THEVALUEPROPOSmON Health: Nutritious dog food is like human food but in a convenient, nonperishable form Identity: To be a credibly caring owner, I need to upgrade to ingredients that I'd feed my family Buffalo's pet food was made with the same ingredients as a good human diet, so by switching brands, owners could ditch their newfound guilt and claim an enlightened identitythey really did feed their dogs nutritious food. Step 5. Showcase symbols that dramatize the ideology. Cultural innovations are brought to life by a combination of symbols that dramatize them in the most compelling manner. They select symbols from the marketing mix that work together, attack the Achilles' heel, and draw a clear contrast with the category's dominant culture. Blue Buffalo leveraged the leading symbols of the natural-foods subculture and created additional symbols to illustrate the notion that Blue Buffalo was, in effect, the same healthful food that owners themselves ate, converted into a compact, convenient, nonperishable form. The company repurposed the subculture's four foundational claims-real meat is the number one ingredient, no meat by-products, no fillers, nothing artificial-and used them in dozens of low-budget ads, produced to look like documentaries: Owners gathered in a living room, comparing notes on their preferred dog foods. Some were taken aback to read that their favorite brand contained "chicken by-product; while Blue Harvard Business Review September- October 2020 113 Blue Buffalo convinced millions of dog owners that aproduct once viewed as afussy extravagance was actually anecessity for people who truly loved their dogs. Buffalo users proudly proclaimed that the first ingredient in theirs was deboned chicken. The company taught owners to read the label the next time they considered buying a bag of kibble. And Blue Buffalo developed its own mini-kibble: LifeSource Bits-small, dark-purple (rather than brown) balls made with superfoods such as blueberries, flaxseed, cranberries, and kelp. The company pushed owners to draw a connection between what their families ate to avoid chronic disease and what would give their dogs the same kind of protection. As Blue Buffalo's challenge worked its magic, millions of owners decided to spend far more on dog food to avoid guilt. They bought into an entirely new value proposition: a new nutritional benefit (healthful dog food contains the same ingredients that healthful human food does) and a new identity benefit (switching to Blue Buffalo proved that they were truly caring owners). WHY INCUMBENT COUNTERATTACKS FAILED Despite the company's strategic brilliance, Blue Buffalo should never have been able to build a business that was worth $8 billion. The three incumbents completely dominated the market and should have prevailed over the upstart. All three invested heavily in new brands and line extensions, but they struck out because, working with a better-mousetraps mindset, they misunderstood the nature of Blue Buffalo's cultural innovation. lams: cultural incoherence. P&G believed that Blue Buffalo was gaining ground by making a big deal of a simple "new and improved" ingredients claim. The company assumed that if it matched those ingredients with a line extension, owners would choose the trusted brand over Blue Buffalo. So P&G launched Iams Healthy Naturals, featuring two of Blue Buffalo's ingredients claims (no fillers, no artificial ingredients), with a big ad campaign and promotions. When that attempt failed, the company tried a more expensive iteration, Iams Naturals, which had meat as the number one ingredient. But to no avail. What went wrong? Both products relied on brand names that tried to knit together the dominant industrial-scientific ideology (which Iams had championed for decades) with the 114 Harvard Business Review September-October 2020 natural dog food subculture-and the result was culturally incoherent. Iams came off as an impostor. It didn't help that the company's advertising campaigns used exactly the same trope (loving owner playing with energetic pet) that industrial-scientific brands had relied on for 40 years instead of showcasing ingredients, a key concern in the natural pet food subculture. P&G unwittingly sabotaged its rebuttal with its confused symbolism. Purina: purpose gone awry. Purina, too, launched a line extension-Purina ONE Beyond-to defend against Blue Buffalo. The effort led with not one but two industrial-scientific brand names (Purina and ONE), inadvertently signaling to consumers that this was not a credible natural dog food. In addition, the company (which fancied purpose-driven branding at the time) decided to tie Beyond to a purpose. It knew from trends research that upscale owners favored green products, so it decided that Beyond would be the dog food that helped save the planet. An anthemic launch ad, depicting a glowing field, proclaimed, "We believe together we can make the world a better place one pet at a time!' The problem was that environmental sustainability had nothing to do with Blue Buffalo's challenge, which centered on nutrition and health. Dog owners simply ignored Beyond. Mars: a mismanaged acquisition. Incumbents' standard response when threatened by cultural innovation is to buy the threatening company or a close competitor. In 2007 Mars did just that by acquiring Nutro, a strong brand in the natural pet food subculture and a credible challenger to Blue Buffalo. That was a promising move. To make it work, though, Mars would have had to shift Nutro marketing to attack industrial dog food, copying Blue Buffalo. It's unlikely that Mars ever considered that move, which would have meant attacking its biggest brand, Pedigree. Instead managers did just the opposite: They converted Nutro to a mass-marketing approach using ads little different from those oflams. P&G, Purina, and Mars never understood that they were fighting an existential battle to sustain their brands' authority as experts on healthful, nutritious dog food-not just racing to clean up their ingredients panels. As a result, Blue Buffalo convinced millions of dog owners that a product once viewed as a fussy extravagance was actually a necessity for people who truly loved their dogs. INNOVATION consumers value. But features aren't just building blocksthey can be malleable cultural symbols of an ideology. The incumbent dog food companies assumed that Blue Buffalo was simply offering trendy new ingredients claims. But in fact those claims became "evidence" in Blue Buffalo's whistleblower project, revealing that owners had been hoodwinked by the industrial-scientific brands. Ignoring the value of identity. The better-mousetraps paradigm views innovations as great functional achievements, but that overlooks a critical component of many innovations: bolstering aspects of consumers' identity. Ford, as we have seen, persuaded customers that they could trade in the dreary suburban minivan lifestyle for outdoor adventure and sophisticated city excursions. Blue Buffalo consumers traded up to gamer status as enlightened dog owners. Christensen introduced one of the most influential ideas in business: disruptive innovation. He famously asked why great companies fail when they're doing everything right. Christensen's answer: Incumbents focus on serving the most-demanding customers with the best products because margins are high. So entrants provide simple, cheap, "underperforrning" solutions to low-end niches. Incumbents tend to ignore segments with poor margins and "inferior" products until it's too late. If one were to turn Christensen's advice into a mantra, it might be "Think like a cheapskate:' But that's not the only innovator's dilemma. Great companies are also disrupted by innovations that don't involve new technologies; a cheap, low-performance product; or a price-sensitive target. Incumbents are so intent on winning the category as it's currently defined that they fail to identify cracks in its foundation. Cultural innovators outmaneuver them because they look for opportunities to blow up the dominant ideology in favor of a new regime. So for incumbents to innovate, they'll need to adopt a second mantra: HBR Reprint R2005J "Think like a cultural entrepreneur:' @ IN 1995 CLAY STUCK IN THE BETTER-MOUSETRAPS MINDSET Cultural innovation has often been an entrepreneur's gambit. Even when incumbents happen upon extraordinary cultural opportunities that should be easy to spot and straightforward to execute on, they fail time and again. If companies are to succeed at cultural innovation, they need to avoid three pitfalls. Working eternally in the present. Even if they don't think in such terms, companies are masters of their category's existing culture. They have to be to excel at their current business. Their metrics and planning focus on it. As a result, managers come to perceive the category as an immutable reality, even though it's actually built on a fragile consensus. If you're trapped in the present tense, it is extremely difficult to examine the category from the outside and identify its emerging flaws. These ideological blinders explain why hundreds of highly trained professionals at the biggest pet food companies responded inadequately when Blue Buffalo attacked their billion-dollar businesses. Being wedded to a product's features. The bettermousetraps paradigm assumes that a product's features are objective characteristics that consumers value. As a result, products are construed in building-block terms-as stacks of features that together create a value proposition. Innovation, then, requires improvements to particular features that DOUGLAS HOLT is the founder and president of the Cultural Strategy Group and was formerly a professor at Harvard Business School and the University of Oxford. He is the author of ® How Brands Become Icons: The Principles of Cultura l Branding (Harvard Business School Press, 2004). Harvard Business Review September-October 2020 115 ~ PHOTOGRAPHER TOBIAS HABERMANN SALES What Today's.. -. Rainmakers --:..~,