115. Gary Pisano – Creative Construction

by MTF Labs | MTF Podcast

https://musictechfest.s3.eu-west-3.amazonaws.com/podcast/115-gary-pisano.mp3

Dubber      Hi, I’m Andrew Dubber. I’m Director of MTF Labs, and this is the MTF Podcast. So I want to just get straight down to business. And since we’re interested in bringing together the brightest minds in any field, if it’s business we want to get down to, who better than a Harvard Business School professor to guide us?

Gary Pisano is, among other things, a researcher, author, and educator. He’s a consultant to a whole lot of the world’s largest corporations, and he’s an expert in industry innovation, strategy, enterprise growth, and international competitiveness. He’s got a particular interest in the biotech industry, but his work spans across fields as diverse as aerospace, automotive, fashion, electronics, entertainment, finance, healthcare, manufacturing, restaurants, semiconductors, software, the chemical industry, and web platforms. His most recent book is called ‘Creative Construction: The DNA of Sustained Innovation’, and it shows how large organisations can develop the kinds of strategies, systems, and cultures of innovation needed to allow for the sort of innovation that we need in order to solve grand challenges, deal with a changing world, and grow.

Dubber      Professor Gary Pisano, thanks so much for joining us for the MTF Podcast. How are you doing?

Gary           I’m doing terrific, Andrew. Thanks for having me here.

Dubber      Fantastic. You’re the Harry E. Figgie Professor of Business Administration at Harvard Business School. The first question, who is Harry E. Figgie?

Gary           He was an industrialist. Started a fairly large company. I don’t know exactly when. It was probably the fifties or so, or forties. Rose to quite a bit of prominence and then endowed a chair at Harvard University, I think because it was interested in manufacturing. And the department I’m in is actually Technology and Operations Management, where we spend a chunk of our time doing manufacturing, and that’s also been a chunk of my research as well.

Dubber      Sure. Operations management being?

Gary           Operations management being a very broad area of inquiry. Everything from supply chains to manufacturing. There’s technical aspects of scheduling.

I’m trained as an economist. My work has always spanned two areas: manufacturing and innovation. I trained as an economist in economics of R&D, economics of innovation. But when I joined Harvard back in 1988, it was actually the then called Production and Operations Management Unit which actually had some people doing innovation. So I joined that unit, but I had to teach about production, so I learned a lot about manufacturing real fast.

Dubber      And this is not specific to any one particular industry. It’s a broad church.

Gary           Yeah, absolutely.

Dubber      Fantastic.

Gary           Yeah, we’ve got folks working in everything.

Dubber      Yeah, for sure. I used to have two books on the shelf in my office when I was a professor. One was called ‘Everything They Teach You at Harvard Business School’, and the other one was called ‘What They Don’t Teach You at Harvard Business School’. And my joke was “That’s the sum total of human knowledge right there.”. What do they teach you at Harvard Business School?

Gary           Oh, wow. Well, it depends how you think about it. Let me tell you how I think about it. Yes, you do learn some stuff about business. You learn about capital asset pricing models, and you learn about some technical things on supply chains or marketing and branding. You learn some substantive things, of course. But if you think of how you could read all of those things in a book, you can get all that.

So I think the way we’ve always thought about it at Harvard Business School, certainly the way I think about it, is we teach you a way to think about problems. So it’s a problem-solving mentality and a problem-solving approach. I think that’s what we do very well. And then I think what we do at our best is we teach people how to learn from their experience. So if you’re thinking about case-based methodology, you’re confronted with a case, and what you’re really learning is how to approach a problem but also how to understand what you don’t understand. And each time you do a case, it’s like an experience, and then you build upon that.

Now, I say to our students that in the first week of their jobs after Harvard Business School, they’re going to have a hundred real-life cases, and what’s going to determine how well they do in their career is not how well they… Partly how well they solve those cases, those real-life cases in their real-life jobs, but how well they learn from those. Where are you on case number one hundred after the first week? And I think we teach… It’s really an approach to learning. An approach to reasoning.

Dubber      I guess how well they do is also affected by the fact that they’re building an incredibly powerful network by being at Harvard Business School.

Gary           I think so. People say that. Nobody’s ever researched that. You do have a network, but folk don’t do folk favours who aren’t good. So this idea that it’s all the network… If you’re not very good, I don’t think the other people are going to do you many favours, and certainly… It would be an interesting question for somebody to do research on. I’d have to think about how you’d do it. I do think people get to know each other, so they obviously… They reach out to classmates, and so that helps. So you’re in the radar screen of people, so if you are good, there’s other people who know you’re good.

But I think what ends up happening is these networks grow very big over time through your work, and you’re exposed to lots of other people. So maybe the power of the network that matters is not the one you got from Harvard Business School or from your university, but through the other things you’re involved with. The companies you’re involved with, the industries you’re involved in, etc.

It would be interesting to study that question in more detail. Certainly, it probably can’t hurt. But if it was just the network then it would be disappointing because then you could just have people come to Harvard Business School for two years and party for two years, and then they know each other, and they’d move on. That would be a very hard experiment to run and probably unethical as well, but…

Dubber      I think it’s pretty much how British politics works. But I’m interested how somebody ends up being a Harvard Business School professor. Were you a lemonade stand kid? Were you this entrepreneurial type?

Gary           Yeah, it’s a great question. Was I interested in business? My father was a salesperson. He was a salesman. He worked for a company called Black & Decker. Machine tools. And I used to, as a kid, go around with him. Sometimes he would take me with him on sales calls. But did I aspire to be a business school professor and go into business? No.

When I was in high school, I wanted to be a lawyer. In fact, I wanted to be a criminal lawyer, funny enough. I used to love reading books by criminal lawyers. I don’t know why, because now it just seems so alien. As an undergrad, when I went to Yale, I thought I’d want to be a lawyer, and then I realised everybody else wanted to be a lawyer. I thought “That doesn’t sound like a lot of fun.”. There was this part of my brain that said “If everybody wants to do something, that’s too competitive. Maybe…”. So then I fished around for what else I wanted to do. And then what I really loved was architecture, so I thought “I want to be an architect.”. I took some great courses in art and architecture, but I’m not very good at drawing, so I got worried about doing that.

And then I wasn’t particularly interested in economics, funny enough, but I stumbled into a professor who was studying the economics of innovation as my undergraduate advisor. That was purely by accident. And I certainly got very interested intellectually in technology and how it evolves, and the impact of economics on trade and economic performance. This was in the seventies when the US was struggling. There was a lot going on with Japanese competition. I actually spent almost a year in Britain studying this at the University of Sussex, down in a place called Science Policy Research Unit, which I think at one time was probably the best place in the world for this type of research. I was just very lucky that I became research assistant there.

And then I was really excited about this, so I went to graduate school to study this, but I still didn’t think I’d be a professor. I thought I’d study it and then go do something else. But then my thesis work turned out to be pretty good, so I got a few good job offers, including one at Harvard. So I said “Well, let me go to Harvard, and I figure after a few years they’ll kick me out. If they cancel the tenure system, I’ll find something else to do. I’ll get involved with a company or whatever.”. But then I kept working, and then I got tenured in 1997. And the longer I did it, the more I’ve enjoyed it. When I first went there, I wasn’t quite sure I really liked it, but I actually love the place, and I love the work I do.

It doesn’t mean I don’t still think about other things, but I think what I’m fortunate about at this stage in my career, and particularly at an institution like the Harvard Business School, some academic institutions really discourage you from getting too involved with practice. They don’t want you to consult. They don’t want you to do any… And they consider it almost being dirty. Harvard Business School has always taken the opposite attitude. Actually, if you think about it, the venture capital industry was started by Georges Doriot. He was a Harvard Business School professor, but he also started a venture capital firm. So we’ve always had this view of “You can be an academic, you can be a scholar, but you can also have one foot in the world of practice.”. And so I have one foot in the world of practice through my consulting. I’m on boards of directors, and I find that stuff really nourishing and exciting and interesting. And so, for me, it’s a perfect balance in the world.

I still love doing my academic research. I still try to publish in scholarly journals, and still do. Just had a paper accepted yesterday, so I’m excited about that. But I also try to do work that’s more practitioner-oriented, and I consult, and I get involved with companies. So, for me, it’s a really happy balance, but I can’t say it was part of the grand plan. I can’t say that I stared out on the horizon at the age of sixteen or seventeen and said “That’s the path I’m going to take.”. It was much more evolutionary.

Dubber      Sure. I’m interested, has the art and architecture helped?

Gary           Maybe. So I’m a big fan of cross-fertilisation of ideas. And I’m fortunate. My wife is an artist. She’s trained as an art conservator. And she does art of different types, and she’s studying botanical art now, and I see… There are connections between things. Studying innovation, it’s a lot of design. Well, architecture is about design. And how do architects work, and what do they do? And I still have those up on that shelf back there, some of my favourite architecture books, so I’ll go back and look at those and find cross-pollination of the ideas. So maybe it’s helped a little bit with my creativity, but I probably can’t put my finger on it. I’m reading books now on art and nature and how patterns replicate, and that’s… Because my wife does botanical art, so she’s always looking at these patterns, and then I started reading about the mathematics of that. So it’s often a direction.

Now, can I say that’s ever going to show up in my research? I don’t know. But hopefully it’s making me a little bit more of a broad thinker about some things. I’m a big believer in broad thinking. And when you think about some people who were really great in things, they’ve crossed over. They were not trained in the original thing. One of the best chefs in the world was trained as a lawyer. So Massimo Bottura was trained as a lawyer, and he became a great chef. One of the greatest photographers of all time – I’m a big fan of photography, and I do a lot of it – Ansel Adams was trained in classical music. I think there is a lot to cross-pollination of fields.

Dubber      Is there something inherently creative or innovative about certain people, or can innovation be a practice that is instilled within an organisation?

Gary           I think it can be instilled. People will say “No, this is born. Creativity is born.”, and think about applying that to any other field. Say somebody’s a gifted brain surgeon. Well, there are gifted brain surgeons. Of course some brain surgeons are more gifted than others, but that doesn’t mean we don’t train the other brain surgeons. We train them. We train everybody. Some lawyers are more gifted than others, but they all get training, and thank god they do. And so I certainly believe that training matters. It helps you.

And I’m not a big fan of the whole mystery of innovation and creativity. I think it’s been made that way – and sometimes self-servingly – that it’s the creative visionary, and “Ooh! These magical powers! And I have them and you don’t.”. And you get these people who write books about that and others who play it up, and you have – I hate to say – other academics who studied some of the Steve Jobses of the world, and it’s all about the mystique of them and the mystery. I don’t think it works that way. I actually think it’s like, look, there are processes here which go on, and there are people who are great at orchestrating those and seeing the opportunities, but they can be trained, and they can be instilled in organisations, and we certainly see that. So, no, I think this stuff can be trained and should be trained.

Dubber      Is there a leadership dimension to that?

Gary           Well, huge, yeah. So, actually, what does the leader do? The leader creates the organisational context in which that can occur. So if you think about real creativity, it involves people playing with ideas that are outside some zone of comfort. Taking a leap and getting into…

So if you think about the first step in a lot of this, the first question we often ask when somebody presents us with a very new idea, new hypothesis, is “Well, how do you know that’s right?”. And that’s actually the worst question you can ask because then you just shut down the discussion, because if it’s a new enough idea, you have no idea whether it’s right. We do that in academia all the time, by the way. Somebody says “I’m thinking of this idea. I’ve got a hypothesis about some phenomenon.”, and they’re very excited about it, and then our natural tendency is to start to ask those hard questions which eventually they’re going to have to answer, but not now. But I’m certainly guilty of this too. I’m sure I’ve asked somebody and said “Well, tell me why you think that would be true.”. And if it’s early enough, the answer is “I have no idea whether it’s true, but that’s why I want to go and explore it.”.

A leader creates an environment where it’s okay for people to say “Here’s an idea. It’s probably half baked.”, “Fine. Go explore it. Go experiment with it. Let’s find out which half of it is baked and which half of it is unbaked, and then we’ll iterate from there.”. Now, eventually, you have to make sure things are done right, and there has to be rigour, but that’s… A leader creates an environment where people can be free to do that, but also hold people accountable then for just not willy-nilly making stuff up, but then being disciplined in how they approach these things. So I think leadership is a huge component to this. Huge.

Dubber      The standard received wisdom is that start-ups are small and innovative but perhaps lack some of the resources needed to execute, whereas these large companies have all these resources to execute with but they’re resistant to risk because the stakes are so high. Is there a happy medium? Is there a way that they can learn from each other? How can that be levelled out?

Gary           Yeah, it’s a great… And, again, it’s the generalities. Are all start-ups innovative? No. In fact, most start-ups die, so it’s not as… And a lot of start-ups are full of all sorts of pathologies in terms of the leadership, and you have a founder who starts a company and has a very definite idea of how things are going to be, and they’re intolerant to everything else. And they’re worse than a big company in some way because they don’t have the resources and they don’t have the agility.

But I do think the start-up attracts people by definition who are willing to take risks. I point this out in my book ‘Creative Construction’, the difference between an innovative environment and an entrepreneurial one. An entrepreneurial environment, true entrepreneurship… In true start-ups, everybody’s risk-taking because they know the data. They shouldn’t be naïve. Most start-ups fail. I don’t know what the exact number is – there’s numbers thrown around – but we know a vast number of them fail. And when your start-up company fails, you lose your job and sometimes all the money you’ve… And definitely all the money you put in. That’s risk, so you get a self-selected group of people who are willing to tolerate that. That’s not the case in a larger enterprise where people are paid salaries. And there’s no way Microsoft is going bankrupt next year. Not with twenty-five billion dollars on their balance sheet, or whatever it is. So you do get differences in the environment, and I think it’s a difference in comfort.

I think what ends up happening in a start-up is there is that true fear of failure, and it’s true fear of failure in a good way that “Look, we have to move. We have to survive. We have to push forward.”. That’s a little different. A larger company can be focused very much on… It will focus on the risk because it’s got more to lose.

And I was teaching a case study not long ago to my class. I won’t mention the company because I’m not sure he’d want me to say it, but it was very interesting. We had a case protagonist there who started up a venture inside a large company, and it’s grown to be quite successful. But he listed a few to talk about it, and he said to them “You spent a lot of your time talking about the risk, but I was struck by the fact you didn’t talk much about the opportunity.”. And the students were like “You’re right.”, and they were like “Wow. We did that. That was our natural tendency, to think about all the reasons the company shouldn’t do this project, but we didn’t think about all the reasons they should do the project.”, and it was an eye-opener. And so I think that mentality, though, can get created in larger companies, where every time somebody proposes something, there’s ten people who will tell you… Not even tell you it’s wrong, but tell you all the things that could go wrong. I’m sure there’s more than ten things that can go wrong, but if you focus just on those, you’re never then going to see what is the potential upside.

Dubber      I was struck by the title of something that you wrote with Willy Shih, the ‘Restoring American Competitiveness’. This was the seminal article that always pops up whenever your name goes into a search engine. And I’m curious about that title because ‘Restoring American Competitiveness’ can be interpreted along the lines of, say, ‘Build Back Better’, or along the lines of ‘Make America Great Again’. Which does it have more in common with?

Gary           Definitely not the latter title by the politics of it. But why did we choose that title? At the time we wrote that article, it was 2008. We felt that American competitiveness with respect to manufacturing, in particular, and as it was affecting what was going on in the technology space, was declining and that we had to figure out ways… And that book is focused very much… That article. And the book is called ‘Producing Prosperity’, which is about the role that manufacturing plays in supporting an innovation-based economy. And so the idea was: to produce prosperity or to restore competitiveness, some types of manufacturing are really required. They are part of the innovation ecosystem. And the thinking there was that we were losing sight of that.

The manufacturing debate… We still see evidence of this, even today. Manufacturing today is not about producing a lot of jobs. About nine percent of jobs in America are manufacturing jobs, and given productivity improvements, it’s hard to imagine a scenario where you produce lots and lots of jobs through manufacturing. That’s not the role of manufacturing. I understand why politicians focus on that, because they have to talk about jobs, but that’s not the kind of direct manufacturing jobs you’re going to be producing through expanding our manufacturing sector. But it’s related to lots of other things. There’s skillsets and knowledge and capability that you require for innovation that manufacturing, if you have it close by, can really be helpful. I think we’re learning a little bit of the power of manufacturing in looking at the last year with COVID. Suddenly, it was like “Well, we can’t produce any masks. We can’t produce ventilators. We can’t produce these things.”, or “We can’t produce vaccines.” or whatever it is. We’ve learned about the power of it for those kinds of issues.

But it’s also important in terms of innovation. A lot of innovative products require innovative processes, and if you don’t have the capability to make those then the innovation eventually gravitates to those places. And that was the point Willy and I were making as our concern, that as manufacturing gravitated outside the US, it wasn’t that everyone else was going to do the grunge work of manufacturing and America was going to do all the fancy stuff of R&D. It was that the R&D eventually was going to follow it. First comes the production engineering, then comes the design, then comes the testing, but, eventually, the other stuff goes with it because there’s many situations where the co-location matters.

Dubber      Right. Something I’m really interested in, the discourse of all this, for me, is that you use the words prosperity and competitiveness almost like they’re synonyms, because to me what you’ve just described is restoring American prosperity, but what you called it was American competitiveness. Why is it important for a country to be competitive?

Gary           Yeah. So that’s a great question. I’m glad you asked that because, one, these terms often get thrown around, but we were pretty clear about it. In fact, when I start talks on this topic, I always ask people “Who are you competing with?” and how we think about that question. And if you asked that question in 1900, people would say “Oh, I’m competing with the folks in my town.”. The blacksmith down the town or the carpenter down the town or the brewer down the town. And if you asked that question years later in the fifties, it was “My region.” or maybe “My country.”. And then with trading blocks, you’d think, well… Within Europe, think about people starting to realise “Wow. I can compete with other countries in Europe.”. If I’m in Italy, now I’m competing with the French, where there used to have more boundaries. Or the US, if you think about the North American free trade area, and “Okay. So there’s more competition.”.

But in the global economies, you’re competing with everybody, so now you’d say countries compete. Well, countries don’t actually compete. The people in those countries compete. American competitiveness has no meaning for me if I’m out of a job. If somebody in some other part of the world took my job, they’d say “We’re a competitive economy.”, it’s like “Not for me.”. So I actually think about the competitiveness and prosperity together of individuals. How do you make people more competitive in their ability to gain access to these jobs? How do you raise skill levels? All of those. And that’s what competitiveness is. It’s the resources of your country and particularly the human resources of your country becoming really competitive in attracting the work they need. When we define competitive properly, it is about the prosperity of the people in them.

Dubber      When you talk about that kind of upskilling, are we talking about training or are we talking about education as the important part of that?

Gary           Yeah, great question. I think it’s both. I think a lot of it is education, but a lot of it is just getting the right skillsets. So, right now, one of the biggest challenges in manufacturing in the US, and Willy and I were hearing it as far back as… Well, we wrote the article in 2008. We wrote it during what was then called the Great Recession, and then we wrote the book ‘Producing Prosperity’ in 2012. I was reading very recently that one of the biggest challenges now as we’re coming out of the COVID induced recession, as manufacturing is scaling back up, is shortage of skilled workers.

If you think about the kind of manufacturing that the US and other advanced industrialised countries in Europe or Japan, the kind of manufacturing that is going to be in those countries where they’re going to be competitive is in very sophisticated stuff, and sophisticated stuff takes sophisticated workers. There’s sophisticated machinery involved, and it takes sophisticated workers. And some of that is education, and some of it is also training, and training workers on that, but I think it’s the combination of it that’s getting people really well trained.

Manufacturing isn’t what it was sixty/seventy years ago, where it was more manual. I like to say it doesn’t require a strong back now, it requires a strong brain. And if you go into these factories now, they’re quite technical. There’s folks in white coats in there. People are operating machines. The machines are working on the product, but the people are working on the machines. So that’s what’s going on there. And there’s programming and there’s geometry. And I hear – Willy and I were hearing this a long time ago – about people complaining “I just can’t find the skillsets I need.”. And in some areas, like skilled machinists, people that operate CNC tools and… They are very, very hard to find.

Dubber      And, presumably, with the onset of AI and robotics in those kinds of environments, the concern would be you need to stay ahead of the robots in order to be able to do that. How do you do that? Is AI coming for management positions?

Gary           Yeah. That’s a great question. It’s coming. What does AI do best right now? It can recognise patterns, so I think any job where it’s all about just purely pattern recognition is likely in some trouble. But there’s a complementarity that I think needs to be appreciated, and I use the analogy of autopilot in aeroplanes. There’s a lot of autopilot in aeroplanes, but it doesn’t mean you don’t want really skilled pilots. And, in fact, you need particularly skilled pilots when the autopilot can’t function right, which, actually, it doesn’t function right under extreme circumstances. So under many circumstances, autopilot is just fine.

You get this discussion with autonomous vehicles. This example was given to me by an expert on AI at Harvard, because people were saying to me “Well, autonomous vehicles means my eighty-five-year-old grandmother can be taken around now. We don’t have to worry about it.”. But he said “If you think about the conditions where an autonomous vehicle won’t work – there’s a bad storm, the sensors are clogged because there’s hail or whatever, there’s ice,” and he goes “Now, that’s a driving condition where you definitely don’t want your eighty-five-year-old grandmother with limited vision in the car. You need somebody who’s really skilled.”. And I think the same thing is true of, say, pilots. When a plane gets in trouble, like the guy who landed the plane in the river, you need, now, superstars.

I think the same thing applies in all these other professions where its AI may handle many routine things and will make some things routine that weren’t before, but it doesn’t mean it can handle all the contingencies, and that actually raises the bar on what the humans have to do. The humans have to handle the really complex stuff that’s the exception, the bad condition, the crisis, the thing where the algorithm breaks down, and they have to be able to recognise that. This gets challenging. You have to recognise when the algorithm is breaking down and it’s time to quote-unquote go off autopilot.

That’s what a good pilot does. A good pilot realises “Wait. Things are not right here. The instrumentation is not right. Something’s going on. I’m going to manual, and I’m going to fly this plane out of a problem.”. Again, I’m not a pilot, so maybe if you have pilot listeners they’re going to say that’s not quite the right example, but stick with me on the broad analogy. You need to be able to get out of that, and that takes skill. That really needs skill. That’s not going to be automated for you.

If you had managers who were just going to follow routines or follow… You see some of this with people doing an analysis with an Excel spreadsheet. It’s not AI, but they get an answer saying “This project has got a higher rate of return than that project. Let’s do that.” without thinking about it. You don’t need that kind of manager. To know which number is bigger on a spreadsheet, you need somebody with about a third-grade education who knows… Maybe second grade, actually. Even in kindergarten they know which number is bigger within a range.

What a sophisticated manager does is says “Wait a minute. Yeah, I know this number is bigger than that number, but let’s go dig deeper. Wait a minute. What did we miss here? Wait a minute. What else is going on?”, and they’re working their way around, and they’re finding the flaw in the procedure, in the algorithm. And that’s what we need now of managers, and we need that for, as well, workers who are now going to be engaging with these systems fairly routinely. And we better educate people about that and train them to do that, otherwise we’re going to have some real problems.

Dubber      I want to talk a little bit about growth because growth is one of those things that… It’s kind of a mantra and the underlying logic of, well, capitalism, essentially. Is perpetual growth sustainable?

Gary           So that’s a question I’m obsessed with. You’ve probably been reading my background because you’re hitting all the things I’m obsessed with.

So my course I teach at Harvard Business School is called ‘Driving Profitable Growth’. It’s the area I’ve been doing my research on for the last four or five years. So it’s more growth for companies than economies. And so certainly for companies, you can ask…

Dubber      Can you separate those things though?

Gary           Great question. You can a bit, but not completely. So you can certainly have economies where individual companies don’t grow, but you’ve got to be able to create new companies that create the growth. You stack on top of it.

The question “Can companies grow perpetually?” – and, of course, I don’t know if anything is ever fully perpetual, but we don’t understand a lot about… So the data shows most companies don’t actually grow very quickly. So it is the obsession of every company, but it turns out to be sustained long-term growth is really rare, not the rule.

Dubber      Do you mean they expand and contract, or do you mean that they plateau and then they grow a bit more…

Gary           Once they plateau, they tend not to grow after that. It’s quite interesting. Companies are a lot like people. They do most of their growing in short time spans. We probably do most of our growing somewhere around the age of – I don’t know – between age… We have growth spurts somewhere around adolescence or so, or age nine to fourteen, whatever it is. It turns out companies do a chunk of their growing… They have periods of time where they grow a lot, and then after that they just plateau. And then they sometimes get smaller by selling stuff off, but they almost never return to their glory days of rapid growth.

Dubber      Is that the same as reaching maturity, or is that atrophying?

Gary           It’s a little bit of atrophy. So I’ve been really grappling with this, and, actually, the subject of my next book will be about company growth. What happens is, it’s like product technology. If you think about what happens to technologies over time, they become more complex because we add more functionality to them, and that’s almost true of every technology. You can measure it by parts. You think about any product. You chart it on a… What was the first generation, the second generation? Do it by cars, aeroplanes, aeroplane engines, computers, computer… Whatever it is, the number goes up. And partly it’s because we ask these things to do more and more, but we begin to plateau. We get diminishing returns in terms of the functionality.

I think we can think about organisations a lot like technologies. An organisation is a technology. We don’t normally think of it this way, but that’s what an organisation is. It’s a technology for carrying out transactions and creating economic value. That’s in some sense what it does. As an organisation, as a technology matures, it begins, and they just get more and more complex. They start adding stuff on to what they do, which makes it more and more difficult for them, ultimately, to change direction. And I think that becomes the key issue, is the markets they’re in are maturing, there’s less growth there, they can’t pivot to others. That’s certainly one hypothesis I have now.

I’m always struck by the massive amount of complexity in large organisations. And I often ask senior leaders “How do you get things done? How do you actually do anything here?”, and they laugh like “Ha, yeah, you don’t know.”. I say “No, I’m serious. Quite literally, how do you do things? Because I don’t understand.”. And sometimes I’ll consult these companies, and then I’ll follow a decision, and it’s like… You get dizzy. I literally say “Let me staple myself to a…”. I don’t know. These days it’s all digital, but in the old days, you can think about a folder being passed around. A Manila folder. If I could staple myself to it and see what happens to that, “I’m a decision. Where do I go?”, it’s just ping-ponged around in all these different groups, and it baffles me. It’s actually quite remarkable things get done in some organisations. So I think that’s part of it.

Now, does that analogy apply at an economy level? I don’t think so because at economy level, you can get births and deaths of these entities. So if these entities become too… They themselves atrophy in a good economy, and I think this is the best of a capital economy. Those companies atrophy, they die, they go away, and new companies rise up. It’s a kind of Schumpeterian process. And you get dynamism, and resources get reallocated. So economies can continue to grow. They tend to grow when they’re young and they have an explosive growth phase, but I think economies can continue to grow. And I think we define growth differently than just sheer output, but it could be quality of life and other metrics. So I do think growth for the economy level can be perpetual and desirable. I think it can be for companies as well, but I think there’s lots of forces that act against it.

I don’t know. I’ll figure it out. I have to figure it out before I write the next book, and then you can have me on a podcast in the future and ask me “So what did you figure out?”, because I’m still grappling with it.

Dubber      I will take you up on that, for sure. At the national level, is GDP still a good measure of that?

Gary           Not really, no. So there’s lots of people smarter than I who’ve written a lot about the limits of GDP. It’s a crude measure, but there’s lots of things it doesn’t pick up. I wouldn’t say “Get rid of GDP.” or anything like that, but there’s lots of things we don’t pick up in these statistics, and as long as we can figure out how to adjust for them in making policies, we’re probably okay to stick with those statistics.

But GDP is just sheerly the output, but how do you think about… If you’re thinking about quality of life… GDP without pollution is different than GDP with pollution. I’d rather have my GDP with clean air versus not. I don’t know how that quite gets picked up. There’s lots of things that occur that don’t…

The other thing I was thinking about the other day was when we measure inflation, we look at purely prices, but it’s very, very hard to adjust for the quality. I think there’s a lot of what I call service inflation, which means the quality of service goes down but the price stays the same. Now, it gets picked up as “Well, the prices didn’t go up.”, but is service really good? And I don’t know if those are fully… It’s hard to adjust for those.

So I do think there’s lots of unmet need. So I’m a big fan of growth because there’s tonnes of unmet need. I’m not one who at all would say “Gosh, we’ve got to stop growing.”. We have to grow. And people who say “We don’t have to grow.” are generally living very comfortably. They’re not the people who are living uncomfortably. And then you ask them if they’d be willing to give up their comforts to allow others to be comfortable, and they’re generally less excited about that. Until you’re willing to give up your comforts… There’s lots of other people who are less comfortable. There are lots of people who don’t have healthcare. There are lots of people who can’t afford things. There’s lots of dirty water in the world that needs to be cleaned up. There’s lots of air that needs to be cleaned up. Those are all forms of growth. When you correct those problems, that is growth. That’s a good thing. So growth can and should be viewed as a good thing.

Dubber      Should we stop making quite so much stuff along the way?

Gary           It depends. When people have enough stuff, they say we have too much stuff. It’s not for me to choose whether we should make stuff or not because there’s lots of people who want stuff, and I think they should buy it and have it. So I think stuff is good. We have to think about ways to produce stuff responsibly. Yes, we should, because the problem isn’t the stuff, it’s the side effects of the stuff. The waste that gets incurred, the dumping, the plastic, all the other junk, the energy that gets used to make the stuff, but we can figure out… Again, a part of good growth is figuring out how to make stuff in a way that doesn’t destroy the planet, create all sorts of problems. So, no, stuff is not necessarily a bad idea if people… Again, people need stuff. There’s lots of people in the world who don’t have adequate housing, don’t have adequate clothing, don’t have things that they need, and so we should be producing stuff.

Dubber      I like that you said that a company is essentially a technology, because it’s also a culture, and that’s a word that you’ve used a lot in your writing. What do you mean when you say culture?

Gary           A culture is a social contract. It’s an agreement that we have – it’s generally implicit. There’s all sorts implicit – about how we’re going to behave. How you’re supposed to behave if you’re part of this group. You want to be part of this group, this is how you behave. And as somebody once put it, its culture winds up being how you behave when no one is looking. And so I think that’s what is incredibly important.

And, look, I’m an economist by training, and economists typically don’t do anything on culture, and I’ve just found it to be really fascinating. And in the work I’ve done on innovation and the ‘Creative Construction’ book, I have a whole… A third of the book is on culture because people talk about cultures of innovation. And, to me, I’m just scratching the surface of that.

And I think culture, by the way, is also part of the growth stuff because one of the reasons companies stop growing is their cultures break. But it is an agreement about how you’re going to behave, and it’s almost never written down. So companies have these value statements and things which are written down, and those almost never reflect the culture. Those are just usually cheesy statements that they paid a public relations firm a lot to create. But then you say to people “What’s really important here?”, and then it’s actually you go watch people. You observe.

So culture are the behaviours, and you can feel behaviours. Sometimes the values are harder to see. So the behaviours are expressions of the values, so I always say “Look at the behaviours.”. What are people doing? What are they saying? What are they not saying in meetings? What are they saying after? That will tell you a lot about what the culture is. So it’s basically the social contract that we’ve at least implicitly agreed to follow, and there’s different ways folks come to learn those. Sometimes it’s just you learn by observing. You go into an organisation, and you… That’s the first thing new people do in an organisation, is they look around. They’re like “Okay, how do people behave at meetings? Who challenges the boss? How do people speak here? Do they…”, and they start to emulate those.

Dubber      It’s not often a monoculture though, is it? There’s often competing cultures within an organisation. An example, I used to work both in radio and music industries, and you’d always get the so-called creatives in one end of the building complaining about the management and salespeople who would always say “Well, it makes no difference whether we’re doing this or shoes or toothpaste or whatever. It’s still sales. It’s just business.”. Are cultural industries special, or are they different in some way, or do those cultural clashes play out in all different industries?

Gary           Oh, they play out everywhere. And they’re not necessarily a bad thing, by the way. So monocultures are dangerous in the sense that… I use an example from nature. Bananas are largely a monoculture because they’re largely one genetic dominant variant of bananas, and there’s a banana blight going around the world. The bananas have been dying because they’re very vulnerable. So, in nature, genetic monocultures are extremely vulnerable to, say, disease or attack.

So an organisation, which is a real… It’s a catch twenty-two because a lot of times people work… We really need to have “We all need to be behind this.”. You get this monoculture, and that works great, but then the environment changes, and then you’ve got… You’re going in this direction and you can’t change.

So some of that tension is good, and you see it a lot, and some of it is understandable. So you see it all over. Research and development versus manufacturing. Through my professional career, because I do both work on innovation and R&D and manufacturing, I have worked on both sides of that aisle, and I’ve just watched that play out. And part of that is natural because these folks have different jobs. The manufacturing person is like “I’ve got to make the stuff. It’s got to conform to quality, and I’m going to be held accountable for cost.”, and the R&D person is like “It’s got to be new and different, and I’m excited, and…”, and those can clash, and you do have to find compromises.

So the clashes actually can be good within bounds. If it gets dysfunctional, and this is where leadership matters, it’s like “We’re going to have different opinions on this. Some of those differences are helpful, but let’s remember the problem we’re trying to solve, and let’s not question people’s motives. We may have different means, but as long as we have the same motives… Look, we’ve got the same problem to solve.”. In the case of the radio you point out, “We’re trying to make listeners really happy because that’s ultimately… If our listeners aren’t happy, we’re not going to make money. If we don’t make money, none of us are going to have a job. So let’s focus on that. We’re going to make the customer happy, or we’ve got to solve this problem. We should be all motivated by the same thing. Now, we have different sub motives. That’s fine. But at the end of the day, let’s not question if the other people involved don’t share the mission.”. If people share fundamentally different missions, then you’ve got a problem. And that’s the job of leadership, to make sure… “We all have different jobs here. We have to. We have different specialities, different things are going to be important, but we have the same job in some way. We’re on the same mission.”.

Dubber      Yeah. It’s interesting. The radio case study, to me – obviously, because I’m interested in it – it’s really fascinating because in the minds of the two different sections… For the creative people, the listeners are the customers, and to the advertising salespeople, listeners are the product. They’re not the customers at all. So the actual motivation is coming from completely different directions. Does that play out anywhere else, or is that just the nature of broadcasting?

Gary           Oh, think about healthcare. It plays out huge. Think about this conversation with pharmaceutical companies. Who’s the customer? They say “Well, the patient. You’ve got patients. You’ve got physicians. You have payers.”. In most parts of healthcare, the people who are paying for the product is different from the one who’s using it, versus the decision-maker, so who do we focus on? So how do you think about that? And different parts of the organisation may be focused on different needs. And the reality is, they’re all important. If somebody won’t pay for a drug, it doesn’t get used. If somebody won’t prescribe it, it won’t get used. If patients don’t want it or don’t know about it, it’s not going to get used. And then, well, who’s paying for it?

So the radio situation is an example of realising that organisations sit in complex ecosystems where it’s not always as simple as what we maybe were taught at one point in time of simple supply and demand. “There’s one side and there’s demand, and there’s one product.”. There’s multiple products that are being sold. And you’re selling advertising, but you’d better sell listeners on it so that listeners come, and so they’re both important. And there may be trade-offs there that have to be thought through, but thought through intelligently. And it doesn’t mean everybody gets their way because that’s impossible, but… So some of that goes back to… Not culture, but it comes back to clarity around strategy and being clear about the trade-offs you may need to make in some of those contexts.

Dubber      The health company parallel is really interesting, and you’re actually on the board of a couple of health companies yourself.

Gary           Yes, I am.

Dubber      That must be a growth industry about now.

Gary           It is, yeah. Look, it’s hard. These are biotech companies. I’ve been involved with pharmaceuticals and biotech since the eighties, so I know that industry well. And I’ve worked with a lot of companies, and I’ve served on several boards. On two boards now. And, yeah, they’re very exciting. There’s just so much going on. I’ve followed and been involved with the biotech, pharmaceutical, life sciences industry… It’s four decades now. It’s going on four decades, which is a frightening thing to say out loud. And the potential to influence lives in a really positive way is pretty extraordinary. And so when we see organisations doing all sorts of new things, and getting a chance to get a front-row seat on that and see how hard it is, too… This is really hard stuff, and some really great people, dedicated, so it is fascinating to watch.

Dubber      To what extent is intellectual property an important component of these sorts of conversations around innovation within large industries?

Gary           I think it’s important because innovation is and can be expensive, and so then the question is “Who’s going to invest in it?”. It’s the classic argument of “Who’s going to invest in it if you can’t somehow protect what you’ve created? If it’s out there.”, especially in a global economy because there’s folks who could just pick stuff up and run with it, and you start to destroy the incentives.

If you go back to how most patent regimes were designed, it was to maximise the trade-off between “Look, in exchange for disclosing, I’m protected. But through disclosing, others can build upon it.”, so good IP law really helps the building upon. It should focus on the building upon as opposed to… Sometimes we want to get rid of the exclusivity. You hear that. “Let’s get rid of that exclusivity.”. You hear this with pharmaceuticals a lot. This sector doesn’t attract the kind of investment it does if everything is generic, so don’t worry about that part. Let people exclude, but then make sure there’s a capacity to build upon and get better.

And so I think IP is quite important in fostering innovation as long as it’s not blocking. Imagine I could patent the car and say nobody else could do anything in cars. Or just electric vehicles. “I have the patent on electric vehicles.”. Some really broad patent. That would be harmful to society because then it blocks all the cascading that can occur. But if I can patent a particular technology within that that I’ve worked hard at, then sure. I have the right to capture that, and I should protect that. Others can build upon other things. If well designed, I think IP can be a really important part of an effective innovation system.

Dubber      You said that we should have good IP law. Do we have good IP law?

Gary           So I’m not an expert on that. I’ve looked at it a bit in the past. IP law evolved, at least in the US, through court cases, through common law, really, and so it depends how courts have been… In general, I think they’ve been striking the right balance. I know some years ago that there were these moves to put on business models that could be patented. I don’t think that went anywhere, and that’s probably a good thing.

I don’t think it’s broken, but there’s people who spend a lot more time… I’ve thought a lot about how companies use their intellectual property and their strategies around intellectual property. I’ve spent less time thinking about the design of these regimes. Again, there are people who spend their careers and who might have very different views. When I think about countries that struggle to innovate or I think about places where we’ve seen struggles to innovate, I don’t think about it as “The IP stuff was what was broken.”. But I think it’s a great topic to be working on. I’m glad your group is working on that with the European Commission. I think it would be helpful to think about it.

And the other challenge, you have the global economies getting harmonisation across these regimes. If you have really big differences then it can really distort things in terms of where things get done and who does what, where, and etc. But it’s an incredibly important asset for companies. Intellectual capital is an incredibly important asset now for companies. And I certainly know the kind of companies I’m involved with where intellectual property is huge, and when you have to spend years working on stuff, we need some way to protect that. Otherwise, we just could never attract the capital to do what we need to do.

Dubber      How pervasive is the ethics conversation in the board room?

Gary           Well, I think they are in every… At least every company I’m involved with. We always make sure we’re being incredibly ethical and clear about what we’re doing, and boundaries, and things which are not tolerated. Ethics should be so front and centre to what you do that you almost don’t need to talk about it, although you do have to talk about it. I think it’s an incredibly important topic. And organisations that don’t have those conversations and aren’t clear about their boundaries… It’s more than boundaries. It’s “How do you treat people? How do you…”. Ethics is a broad term, but having a real ethical compass I think is important because there’s complicated decisions that you have to make in a health organisation. In every organisation, you’re making complicated decisions, so you’d better have real clarity about that and know where your compass is pointing.

Dubber      The more specific aspect of that question is are ethics part of the metric for how well you’re doing as an organisation?

Gary           Yes and no. Certainly, in Wall Street… Investors don’t measure that. Some say they do. But they matter because if you’re not… Look, I think we’ve learned that if companies are not ethical, they get clobbered. It’s a losing proposition to be unethical.

Dubber      I’m seeing some really big counterexamples to that in the world.

Gary           Yeah. If you think about companies that make huge ethical violations, I think… Now, some companies don’t get caught, but the number that do, it’s…

Dubber      I’m not talking about not being evil. I’m talking about actively being good.

Gary           Yeah, are you actively being… So this gets to a really interesting debate about “What does it mean to be actively good?”. So I think some organisations would argue, some philosophers would argue, that, look, what does it mean to be actively good? Hiring and employing lots of people and paying them well is being good.

In fact, there’s arguments that are interesting – I’m not sure where I come out on it – and say “Look, the whole idea of stakeholder capitalism just gives more power to CEOs, and they already have enough power.”, so “Our elected official should have more power.”. There’s a counter-argument to what’s going on now with “We need to fix capitalism. We need to make it more ethical.”, or “We need to make companies have broader social responsibility.”. I’ve read some very interesting counter-arguments that say “You really want CEOs to have more power? Don’t they already have enough? The power should be at the ballot box.”. And some people argue “Well, the ballot box is broken. That’s why we have to turn over to companies.”. So you see where we are with this.

And we have these discussions in my class, too, around companies that grow and companies that have different approaches to capitalism and ethics. And, again, ethics not in terms of doing bad, but good, like how some companies view what their mission is. And I don’t think there’s easy answers to that. I think, ultimately, what companies are going to get rewarded for is, look, they need to attract customers. Customers have to care about the ethics of the company. The investors have to care about it as well, and that’s what influences behaviour.

I’m always surprised at the number of people I run into – and who you sometimes least expect in terms of their background. Private equity managers and all that – who care… They think a tonne about those things. Like “What’s the right thing here to do for the employees? What’s the fairest thing to do?”, or “How do we think long term?”. So I think there’s stereotyping that gets done that’s not always helpful in it, but it is an interesting question.

Companies are being ethical when they’re producing great product for customers that they didn’t have before. Giving people choices they didn’t have before. It’s very popular now to beat on Amazon. Everybody loves beating on Amazon, but everybody uses Amazon. I can just tell. Looking out my window, I can see all the Amazon boxes on all the houses. And I see them around and realise, well, there’s lots of people for whom Amazon is an absolute lifesaver. If you’re working, you can’t get to the store, Amazon delivers. Now, if you’re a small merchant, you hate Amazon. I get it. There’s controversy on “How does Amazon treat its employees? Do they treat their employees well?”. Amazon would argue, “Look, we employ…”. I think around the world it’s six hundred thousand people. These are complicated arguments to think through. I don’t know if there’s a single right answer to them.

I certainly think that organisations do well when they treat people well. That is, when they treat their employees well and fairly, when they treat their communities well and fairly, and they treat their customers well and fairly, and do the simple “Do what’s right by them.” as opposed to “Do the minimum we need to do.”. I think there’s a good view of just doing, in the end, what is right by people. That can go a long way, and just having that as your compass.

Dubber      You get invited to consult to a lot of companies, and presumably you say some of the same things to all of them. What’s something common that you would… Let’s say you were invited into Amazon to tell them something interesting to help them… Presumably, that you get invited because it’s helpful to the company for you to be there. What is the helpful thing that you would be likely to say to an organisation?

Gary           Yeah, pretty much. And, by the way, we were just talking about ethics. I’m not an ethics expert. There’s people who spend their careers thinking about it, so that’s certainly one of the areas I don’t get invited for because there’s people far smarter than me on the complicated issue of ethics. And it’s an incredibly important issue, so that would be one where I wouldn’t be invited, and if I were, I wouldn’t speak on it because I don’t think I can say anything that some other people who are much better at it…

But the kind of things I get asked to speak about are really a few things. One is innovation and the work that came out of the ‘Creative Construction’ book. How do we maintain our innovativeness as we get bigger, as we grow? Because that’s been one of the dilemmas. You said it at the outset. As companies get larger, they lose that risk-taking. What else do they lose, and how do they create that verve? You innovate to grow, and then you grow, and then you lose the capacity to innovate. It sounds really miserable. I refer to that in the book as a catch twenty-two. And so that’s a lot of what I work on with organisations. What I get asked to speak about. And, to me, you can grow… Sorry, you can innovate as you grow, but it’s about clarity of the strategy. It’s three things. It’s strategy, it’s good systems, and it’s the culture, and those are the three jobs of leadership. So that’s a big chunk.

I speak a lot and work with companies a lot on just strategy alone. So I think many organisations don’t have… Strategy is an expensive word. It gets used a lot. Everybody’s a strategist. And then you ask “What is your strategy?”, and you get some eighty-page PowerPoint presentation that’s loaded with charts. And it’s like “Look, a good strategy, you could stick it on one page. What is the fundamental purpose of this business? What are the fundamental choices about how it’s creating value? And what’s it about, what it’s not about.”. And it turns out, strategy is a really hard thing to work out. It’s a simple problem in the sense that it’s not multidimensional, but it takes a lot of work to figure out, and it is a creative act to figure it out and to work through it and make sure you understand what this organisation is going to be about or not. I work a lot with companies on just helping them be clear about strategy because I find the practice of strategy, in reality, is quite poor. So I often work a lot with companies on strategy.

Dubber      Do you need to be an optimist to do what you do?

Gary           Yeah, I guess so. Somebody once referred to me in an interview and they said I was an optimist by nature, and my wife laughed at it, so I’m afraid if I… And she always listens to my podcasts, too, so I’m going to be careful how I answer this one. So I think I am. She’s going to be laughing right now, I know, when we get to this part of the interview.

Yes, I am. I really am an optimist about things. I don’t know if you have to be an optimist about things, but you have to feel like you can change what’s happening. I think all of us who get into this world of social science, you’re trying to make things better in your own way. And, for me, I try to make… I certainly believe that if you can make organisations work better, you can actually make the world a better place. They create more value. They create better jobs. They can operate better. And I believe that with the right kinds of… We can make progress, just like we make progress with technology. Our televisions today are better than they were when I was a kid. Our phones are better today. Things are better. Technologies are better. Again, organisations are technologies. That’s all an organisation is. We can make those technologies better.

So, yes, I’m optimistic. I guess if I weren’t optimistic about that then I would find something else to do with my time. I’d probably retire and just do lots of photography.

Dubber      Brilliant. Gary Pisano, thank you so much for being on the podcast. It’s been an absolute pleasure.

Gary           Great, thank you very much. That was fun, Andrew. Thanks.

Dubber      That’s Professor Gary Pisano from the Harvard Business School, and that’s the MTF Podcast. Gary’s book is called ‘Creative Construction’, and you can pretty much find that anywhere you’re likely to find business books. You can follow Gary on Twitter, @motogp61. Not sure why, didn’t ask, but we’ll link to that on the podcast page. His website is www.gpisano.com, where you can read more about his work and his many, many publications. I’m Andrew Dubber. You can find me @dubber on Twitter, and MTF Labs is @mtflabs and, of course, www.mtflabs.net.

Special thanks to Gary’s wife Alice for listening in this week. This is one way to grow the audience. Hope you enjoyed, and we’re really happy to have you with us. Thanks also to the team – Sergio Castillo, Mars Startin, and Jen Kukucka – who make the show possible with their diverse and complementary range of skills, to Anthony Vega and airtone for the music, Run Dreamer for the MTF audio logo, and, of course, to the MTF community of brilliant minds from all sorts of backgrounds and specialisms, of whom you are a valuable and valued member. So I’ll catch you next week, stay safe, and we’ll talk soon. Cheers.