2: Today's Business Revolution
In the present day, we look to technology companies as the innovators in society - but they were not the first to do this. Ford, Walmart, Southwest Airlines, and Macdonald's were all built on innovative ideas that left the competition in their wake. They didn't beat competitors by being more efficient at the same processes, but by discovering new processes.
Thomas Kuhn is mentioned, as he introduced the idea of "paradigms" and "paradigm shift" in a 1962 paper on scientific revolutions. The word "paradigm" had been used before, to mean a model or pattern for action - in effect, a process or plan. Kuhn's notion was broader: it is a model or pattern that is being followed by an entire field of science, which causes it to ignore anything that falls outside the normal pattern. A shift occurs when there is something unusual that cannot be ignored, and which overpowers traditional perspectives, and becomes the new paradigm.
While Kuhn was speaking of the evolution of scientific ideas, the same is true of business practices: entire industries fall into "best practices" and imitate one another - and entire industries are left behind by rogue upstarts who abandon traditional ways.
The Foundation of Great Companies
"Pick any company" that has produced an extended run of breakthrough results, and you will find that its success derives from an idea that contradicts prevailing beliefs of their competitors. In essence, their success can be described in a single sentence:
- They (did this) while their competition was (doing that)
Krippendorff searched for large companies with the highest ten-year revenue growth, with profit margins in excess of 10%, and with an average five-year return on equity of over 10% - and in many instances found that they could be described by that sentence.
- Google focused on search while its competition was expanding to become portals
- Netflix delivered movies by mail while its competition was building more stores
- Sohu was building internet search for China while its competition was focusing on developed markets
- Intuitive Surgical was marketing to patients while its competition was marketing to surgeons
- eBay was facilitating peer-to-peer commerce while its competition was focusing on company-to-customer
- Apple was focusing on usability while its competitors were pursuing technical sophistication
- Southwest was providing low-cost travel using a point-to-point model while other airlines were offering high-end services using a hub-and-spoke model
- Dell sold direct to consumers while its competitors were pursuing retailers
- Home Depot sold to the do-it-yourself customer while its competitors were pursuing contractors
It's plain to see that standard practices are not bad ideas, and many of them seem entirely sound. But breakthrough ideas embrace an option that others ignore, and which seems contrary to standard practices and commonly-accepted paradigms.
Take the last in the list as an example: selling supplies to contractors is an entirely sound approach, based on the equally sound notion that fewer sales in greater quantities decreases expenses. And while selling direct to consumers increases the cost of sales, the volume of business and the customers' willingness to pay higher prices more than compensates for the increased cost.
Nine Trends Transforming Our World
The innovators do not merely enjoy personal success, but transform industries, markets, and economies.
Henry Ford's shift from small shops of artisans to a production line that produced standard products transformed his own business. But when the idea caught on, it transformed the entire automotive industry as well as the plethora of industries that supply it. And when the product caught on, it transformed American culture itself - both in the workplace and in the everyday lives of people who drive, rather than walk.
(EN: It's also worth noting that Ford's innovation wasn't his invention. He nicked the idea of the assembly line from a meat-processing plant. And the notion of the division of tasks to be performed by specialized laborers, rather than having a master craftsman fashion an object from start to finish, hearkens back over two centuries to Adam Smith.)
The point to be taken is that business often trails science by decades or centuries, and many of the "innovative" ideas are already out there, just being pointedly ignored by entire industries.
And so, by considering some of the current trends, we can see the kinds of ideas that will spawn innovation in the near future.
1. The Erosion of Economies of Scale
The traditional approach to taking command of a market was to flood the market with cheap goods, which entailed building a factory so big that competitors would be unable to match your capital investment. Even those who could afford to do so would take months or years to get their operations up and running, by which time you would have taken command of the market and they would have to fight to pull your customers away.
However, the market has changed, such that this is a liability: for many products, people want something tailored to their needs and shun the uniformity of mass-produced goods. They also want "the latest" and a large industrial plant cannot be easily configured. Price is no longer their prime consideration, beyond a certain point.
This has given rise to niche brands, which serve the specific needs of a smaller number of customers, or even those that can be customized to the individual. It's no longer necessary to own a factory, as manufacturers can be contracted to produce as needed with little incremental costs - so it no longer takes millions of dollars to bring a product to market.
2. Acceleration
Not only can a product be brought to market cheaper, it can also be brought to market faster. A company does not need to take the time to build a factory, but can merely hire one that already exists, to launch a new product. It also does not need to spend time retooling the factory to change its product or offer a new one.
Markets also adapt to new products more quickly. He cites one of his clients, a global beverages corporation, which once took two years to launch a new brand - not only to plan and prepare to make the product, but to introduce the brand to the market. Today, it takes only a few months.
As evidence of the speed at which new brands are accepted by the market, consider it took Walmart 27 years to reach $30 billion in revenue, whereas Amazon did it in 16 and Google did it in 13.
Companies that went public in the 2000s grew to be worth $30 million 18 months faster than those who went public in the 1990s. (EN: This has less to do with revenue from sales than the availability of capital to finance operations, but that has also accelerated.)
Once, a company could count on making the same product for decades and could focus on doing it efficiently as a means of competition. Now, companies are launching a continual stream of products, often skipping the lengthy research and testing work and releasing to the market immediately, then adapting based on their reaction.
In industries across the board, the cycle times are shortening and the pace of competition is accelerated.
3. Specialization
The traditional trend toward aggregation and conglomeration is reversing as large companies that make many products are disintegrating into smaller parts. This enables firms to concentrate and specialize, and to be more focused and nimble in serving customers needs.
(EN: I'm not sure this is necessary, as there are many companies that make dozens or hundreds of products and allow each line to be largely autonomous, but it does seem to be a trend.)
Krippendorff mentions researching companies that specialize versus those that aggregate, and the specialists generate "nearly twice the profit per employee" as the aggregators.
The difference is not optimization of operations - they do not extract greater productivity from individual employees. Instead, their operations are more streamlined, as there is less waste and redundancy for a specialist. They also attract greater revenue from their customers, gaining more share-of-wallet from a niche than share-of-market from the masses.
For example, outsourcing is also a source of efficiency for smaller firms: rather than maintain a sitting staff of payroll accounts (who are often "sitting" and waiting for something to do between payrolls), firms hire the work out at lower cost and less waste.
4. Free Flow of Information
Companies used to benefit from controlling the flow of information: keeping competitors unaware of their plans, and keeping customers unaware of their competitors' offers. But the Internet and mobile communication have changed that: consumers regularly discuss products online, and talk about what hey are doing at the office. The information cannot be contained.
He cites some of the statistics about the Internet, mobile, and social media, which have shown astounding growth to the point that it has become ubiquitous. (EN: However, some of his claims are erroneous, and are based on the assumption of one device or channel per user. It's still staggering, and it is indeed ubiquitous in the developed world.)
The point is that the free flow of information puts power in the hands of customers, and takes it out of the hands of marketers.
5. The Death of the Middleman
The traditional model of retailing is also changing, in which the supply chain involved one or more middle-men between a manufacturer and their customers. Today, they can sell and support directly, which creates greater speed and cost-efficiency.
Consider the decline of the shopping mall as evidence of the decline of brick-and-mortar retail. Consider the virtual extinction of the travel agent as individuals book their airline tickets and hotel rooms online. Consider the number of other long-standing industries that are in decline, or in danger.
The notion of aggregators such as Expedia or Amazon is not entirely analogous to retail: they are middlemen, but exercise minimal control over inventory and instead provide shopping convenience. However, he does mention that search engines, such as Bing and Google, are stepping in: customers use Bing instead of Expedia, Google instead of Amazon, to find products and click directly to the supplier without an intermediary.
There's a bit of a sidebar on Netflix, which killed the brick-and-mortar video rental store, but which is itself now considered to be in jeopardy because streaming video makes mail-order seem quaint and fewer providers are willing to enable streaming through their service. It suggests that Netlfix could well follow the path of TiVo and AOL, as a service that was necessary for a time, but was consumed by cable television companies (who offer internet access and DVR devices).
6. Self-Organized Citizens and Customers
The political revolutions in Tunisian and Egypt are often credited to Twitter and Facebook as a means of communicating ideas an organizing revolts, which is an example of the ability of new communication technology to overcome traditional hierarchies in which communication is rigidly controlled.
(EN: It seems a bit of a stretch to apply this notion to markets, and the author can offer only the result of a survey in which CEOs cited the "development of technologies that empower customers and communities" as being a serious concern.)
7. The Shift in Power Toward the Developing World
Traditionally, third-world countries were ignored as being largely irrelevant. In terms of the global market, they were sources of raw materials top the industrialized world, whose consumers did not have sufficient spending power to be worth much consideration as markets.
But now, we are seeing more industrialization in these nations, more significant gross domestic product, and higher personal income. They are no longer being regarded as backwater colonies, but as emerging markets that will grow to maturity within the next few decades.
These competitors, and customers, are still being ignored by many in the industrialized world, and it is to their peril.
8. A Rising Global War for Talent
While the recent financial crisis has the media concerned about unemployment, a growing concern in the commercial sector is the limited availability of qualified human resources. Companies, particularly in developing economies, are starved for qualified people and recognize that lack of qualified people is their most significant barrier to growth.
But even in the US, in the midst of recession, the author claims to hear "friends and clients" expressing concerns about getting the talent they need, particularly in R&D and strategy, who can guide organizations. The McKinsey Global Survey of business leaders cited the talent shortage as a key challenge.
This used to be a regional fight, but the mobility of population and the ability to have a virtual office are moving it toward a global market for labor that is in short supply.
9. Global Network Volatility
Goods, capital, information, and people are generally flowing more freely among nations in the past few decades, and the trend is expected to increase. This makes the world a more interconnected place, in which countries are not insulated from one another.
"Who would have thought that mortgage troubles in Nevada would lead to the collapse of Iceland's financial system?" And it's well known that every conflict in the middle east affects oil prices in a manner that is felt the world around.
The connection, however, is a bit vague, as the author asserts that in a world where everything is connected, "Companies that can make volatility work to their advantage will win." He's not particularly clear on how.
Conclusion
Krippendorff considers what the collision of these nine trends means. In essence, it is a change in the paradigm: the juggernauts of industry who have long depended on improving efficiency will give way to smaller and more nimble firms who are better at innovation - and given that we are presently in an era of transition, there is great opportunity to outmaneuver long-standing titans.
But just being small and fast is not enough - you have to recognize opportunities and seize on the good ones. You have to out-think your competitors before you out-maneuver them.