Transforming Old Industries into Data Businesses — Tony Fadell, CEO Nest

The Industrialist’s Dilemma — Session 3

This post first appeared on January 31, 2016 in The Industrialist’s Dilemma.

Given his lengthy experiences in both large and small companies, and drawing upon on his career successes and failures, Tony Fadell of Nest was our third guest on January 21, 2016 in The Industrialist’s Dilemma course.

Tony owned the room during the class

In this session we spent a great deal of time discussing how “systems thinking” regarding all aspects of one’s business has fundamentally changed how companies like Nest develop both products and services for customers, and also the ways in which incumbents can successfully transform their companies.

Software Is King In This Cycle

In a world where delivering complete solutions requires hardware design capabilities, software system and application skills, and interconnectedness with a variety of different nodes on a network, the economic value to customers is increasingly moving to software competencies in this wave of complex system delivery. The software components are what allow companies to build both new products and services which grow on top of initial product sales.

While complete solutions require all three of these technology components in their development and deployment, the flexibility and ability to add new features is driven by the software competencies of the organizations.

This thread of the class got us thinking about why it is easier for an outsider to come after industrialists at this moment in time — if firms start with a competency of world-class software capabilities, it is actually becoming increasingly easier to add hardware design know-how at this point in the technology business and product lifecycle. If a company has spent the last several decades largely building best-in-industry competencies in creating physical goods, factories and supply chains, even though these skills are still needed for success, they are no longer sufficient (and are even less important) in the next wave of customer solutions.

Chatting with Tony about The Industrialist’s Dilemma

The New World Order Demands An Inclusive Ecosystem

When leaders take a systems-based approach to thinking about one’s products and services, they unlock the potential for business model innovations and a more collaborative approach with others. Tony shared a story about how if customers opt-in to one of Nest’s energy saving programs, his company can reduce up to 60%-70% of the peak spikes that utilities face during high-demand hours. This program not only creates financial incentives for customers due to cutting electricity in high-demand hours, but utilities end up paying Nest for enabling the savings of both creating and managing energy during these windows. Digital disruptors such as Nest are bringing the ability to include others into their ecosystem (in this example, utilities) which opens up new revenue streams that incumbents have either not considered or have chosen not to pursue.

Tony also shared that 20% of Nest’s users are taking advantage of their Works with Nest program, which enables third-party products such as light bulbs and washing machines to coordinate with Nest’s solutions in order to reduce energy usage, schedule times at which these products operate and even keep people safer.

These network effects are leading to a richer consumer experience, which makes for happier customers and leads to people’s desire to buy more products which interact with the Nest ecosystem. In the traditional industrial world systems were proprietary and closed — often for the desire to make systems highly deterministic and for industrial firms to control the customer-base. But in the new industrialist world, products and services need to be more open and operate with the advantages of network effects in ways which they never have previously.

Tony, Aaron and I share a laugh after class

Incumbents Are Not (Necessarily) Doomed

We asked Tony if the decline of incumbents is inevitable, or if there is anything they can do to make the transition to the new era of digital products and services. Tony was actually upbeat that a path exists, though he cautioned that it is extremely difficult to navigate. He posited that the key attributes of a successful incumbent organization must include air-cover from the CEO of the company for wild new product ideas, the stability of a CEO who will be around for an extended period of time to maintain that air-cover, and the ability to use an incentive structure that rewards innovation which is outside of the traditional ones which exist in a company.

Tony talked about his history at Philips (where he was not successful with certain products he developed) and at Apple (where he was) to share where he believed that incumbents do not need to fail and become a victim either to a Schumpeterian creative destruction or to the The Innovators’ Dilemma, as is often the case during periods of technological innovation.

Tony’s comments reminded us of the three tenants espoused by George Kliavkoff on what is required for innovation in multinational conglomerates:

  1. An executive mandate,
  2. A creative structure,
  3. Patient capital.

While these things sound simple they are not easy to do.

My first-hand experience, as someone who has worked in Silicon Valley for over 25 years in a variety of operating and VC roles, but who also ran a division of GE in the last decade, made me highly attuned to this part of the discussion and acutely aware of the challenges associated with this portion of The Industrialist’s Dilemma.

When I went to GE in 2004 I took a substantive paycut, but made the tradeoff to join the company so that I could get the education and competencies that come with being a General Manager at GE — and receive all of the skills and training that GE affords its leaders in running large businesses.

I’m better at what I do today because of the time I spent there — but in the end I made the decision to return to Silicon Valley. While my journey is simply one datapoint in a mosaic of integrating those with digital DNA into an existing industrialist company, the ability to draw upon and retain the thinking and skills of those with a different mindset and perspective will be increasingly critical for industrialists during this next wave of product and solution deployment.

We are looking forward to raising this issue with Beth Comstock of GE and Mark Fields of Ford to see how they are wrestling with this aspect of both product and organizational development — how does one attract talent that is up-to-date with the latest software development and design technologies, when the reputation, culture and compensation structures of industrial incumbents are vastly different from today’s digital leaders?