David has the edge on Goliath

David returns triumphant with the head of Goliath (Palazzo Ferrari, Genoa)

David returns triumphant with the head of Goliath (Palazzo Ferrari, Genoa)

Is success in business due to luck or hard work? It used to be that if you worked hard and invested astutely in your business that you could expect to be rewarded. Build it and they will come. Times have changed though, and more and more often it seems that all that hard work goes to waste when an unknown (and previously unseen) competitor emerges from nowhere to steal the market from under your nose. Success has become random with the business environment perpetually unstable and in constant flux. The market is hit-driven rather than being based on careful investment. Success now depends on coming up with the right product at the right time, and having a fairly large dose of luck. Business development used to mean investing in your business and building up the assets under its control. Now it means maximising your business’s luck (or minimising the luck of others).

The story of most businesses is a tale of the steady accumulation of assets; a slow process of working from smaller things to larger things. Being a larger business is good. You might not be the first to market but your size – the vast resources under your command – mean that you will steamroll the smaller competition. Many (if not all) business strategies can be boiled down to get big or go home; grow fast and grab the market or watch someone else gab the market and push you out. And by ‘big’ we typically mean ‘owns or controls the most resources’ (be they physical or virtual) as it’s these assets that have provide your competitive advantage.

However, recently it seems that David has the edge on Goliath rather than the other way around. Small companies and companies from outside the usual suspects are swooping in and snatching the market from the hand of the incumbents. Apple came from nowhere to steal the smart phone market form Nokia and RIM. MySpace was overcome by Facebook despite (or because of) having the backing of Newscorp. Even high street department stores are falling to smaller and nimbler online competitors who offer broader ranges of the latest products at prices which are impossible to match. These new competitors can emerge from anywhere, from companies that have been written off has has-beens through to young upstarts with only a few dollars to their name.

The top echelons of business has traditionally been a fairly small and stable club, a club dominated by those few organisations that managed to collect enough resources, enough assets, to dominate their chosen market. The major record companies, for example, dominated the charts as only they could afford to fund the recording, marketing and distribution resources required to create a hit record. Once released, the record companies could expect a fairly long life for their recordings largely due to a lack of competition (it was, after all, expensive to produce one in the first place). Similar situations existed for newspapers, computer games, movies, cars, department stores, televisions, toasters, and so on. Most markets tended toward having roughly four dominant companies who together captured the majority of value in the market, companies so large and with so many resources that smaller companies found them impossible to compete with.

Markets today, in contrast, seem perpetually unstable, with most of the profit coming from a small number of hits, and these hits can come from anywhere. Only a small nudge is required to topple today’s incumbents and install a new lot. Technology has slashed the cost of production, marketing and distribution. In many cases production, marketing and distribution can be consumed as a service. Now anyone can produce a hit.

The challenge today is to get enough people to notice your product – to hit jackpot of the right product at the right place and time, to see it take off – in an increasingly crowded market. We’re seeing a lot of markets split in two as a consequence. On one side of the market we have the incumbent global titans pouring money into marketing, as marketing spend is the only lever they have left that seems to work. On the other side are the smaller producers working hard to deliver a quality product at the right price, but to a limited audience (everyone is famous for fifteen people, as the saying goes). This audience is steadily growing though, as the smaller producers use to service such as KickStarter, Steam and social media to incrementally erode the advantage of the incumbents.

So how do we succeed in this unstable market (this the new instability{{1}})? Given that the old path to success – the steady acquisition of assets and get big or go home – has lost its potency we can set aside received wisdom on what ‘works in the market place’. We need to find new ways to develop and grow our businesses, how we can optimise our luck by increasing the possibility that we will be at the right place and the right time with the right product to close the deal. Amazon, for example, uses the Kindle to ensure that they’re at the right place, right next to the customer when the customer decides to purchase. Apple’s gradual move away from product version numbers (with the latest iPad simply called the New iPad), and their tendency to maintain a product’s design once they’re happy with it, allows them to provide the product at the right time by ensuring that the latest iPad is the first tablet that their existing customers turn too when their old iPad reaches the end of its useful life, rather that waiting for the next version or engaging in a shopping mission and a feature-function comparison. And, finally, we can provide consumers with the products they want either by providing them with something unique, as Betabrand{{2}} does with products such as their Betabrand Disco Pants (as ‘unique’ is the most valuable word in a crowded market full of generic products and overwhelming redundancy), or by swooping in and either buying or copying a existing product that is rapidly gaining traction in the market.

[[1]]Peter Evans-Greenwood (2012), The New Instability, Egxating.[[1]]

[[2]]Amy Wallace (October 2010), Whimsy (and clothes) for sale, The New York Times.[[2]]

Assets have formed the traditional foundation of any successful business strategy. These assets might be the deposits in a bank, the tools and machinery in a factory, the trucks and distribution centres in a supply chain, or even the good will of a customer base familiar with a brand. Over time the influence of these assets on business performance has drop dramatically. Return on assets (ROA) had drop consistently over the last forty years while infrastructure penetration has risen during the same period of time{{3}}. More companies offering more products to more people and they’re doing it without the need to invest in factories, supply chains or marketing.

[[3]]Center for the Edge (2011), The Shift Index, Deloitte.[[3]]

ROA for the U.S. Economy (1965–2010).png

 

The move away from assets as the foundation of successful companies has been a slow one. If we look back over history we can detect three trends in this shift: from resources to reactions, from computing to connections, and from data to decisions.{{4}}

[[4]]As discussed in The New Instability.[[4]]

We used to collect resources – accumulate mass – as Henry Ford did when he went to the extreme of founding the industrial town of Fordlândia in Brazil to secure his rubber supply. Through the sixties to the nineties we worked on velocity, using tools such as LEAN and Six Sigma to reduce waste and increase the speed at which raw materials and finished product pass though our supply chain. Now we worry about acceleration, the ability to rapidly turn our business and change what it is working on, which has resulted in companies such as Zara who can take a new product from idea to stores in roughly two weeks.

We used to worry about getting enough work done – computing – hiring rooms and factories full of people to process the data, oil the machines, and to keep the wheels of commerce turning. With the advent of automation and information technology we’ve been gradually transferring responsibility for actually doing the work to machines. We’ve moved from working in the business to working on the business to the extent that now we focus most of our energies on the connections between our business and others; other partners, other suppliers, the government, our customers, and even out competitors.

We used to struggle to collect enough data to drive our decisions. From the carefully guarded merchant’s notebook listing hard won information on the price of commodities in various ports, through scientific management (with brings to mind an image of a man with a hat and a stop watch) and modern data warehouses, we’ve been slowly collecting more and more data. Today with the advent of the internet we seem to be swimming in a sea of data, with the synergistic relationship between Big Data and the web adding data to the sea at an ever increasing rate. Our challenge now is to know which decisions to make (and which to avoid) and how to best shape them.

Collectively these three trends – resources to reactions, computing to connections, and data to decisions – have resulted in a perpetually unstable business environment. The barriers to change are so low that change has become an everyday occurrence. It’s an environment where black swans, supposedly rare disruptive events, are nearly an everyday occurrence. Nowhere is this more apparent than in the music industry.

The introduction of (relatively) low-cost four track recorders in the 70s and 80s slashed the cost of production and gave birth to the punk and downtown scenes by enabling most anyone with something to record a few tracks. During the 80s the independent distribution network provided a low-cost alternative to the expensive distribution channels controlled by the a major labels, enabling many independent bands to give up their day jobs and go full time. While not the road to riches, it was possible to earn a comfortable living doing the thing you loved. All of this had little effect on the major labels, as they were still the gate keepers of access to the mass market thanks to their control of the marketing channels. They would even swoop-in occasionally and grab some of the more successful independent bands to flesh out their catalogues.

The arrival of the internet, and Napster with it, changed this. Suddenly the musicians could talk directly to their audience. A video uploaded to YouTube might – with a little luck – go viral. All it took was an interesting product, good timing and a fair dose of luck. Suddenly the major labels found their margins under pressure as they no longer had exclusive access to the mass market. The majors’ investment in recording studios, distribution networks and marketing are not the barriers to competition they once were. Hits could come from anywhere and anyone could make a hit. The next block buster might come from one or the majors, but it is just as likely to be a smartly dress man from Korea, or a teenager singing their own songs in their bedroom in Scotland. In fact, those carefully built assets are now starting to look like the a liability, as the majors are competing with must more nimble organisations who have much lower cost structures.

 

Something similar is happening in other industries. Megabus, for example, is doing away with bus terminals to provide direct kerb-to-kerb services between cities in the UK and the USA. By eliminating the fixed infrastructure required to support a more conventional bus service, Megabus can offer lower fares (often starting them at $1, and then increasing them as the departure date approaches) and can scale the number of buses supporting each route to support demand on a trip-by-trip basis.

Kogan{{4}} (a favourite of this blog) has built a thriving consumer electronics business in five years without the need for traditional invests in factories, distribution networks, or retail locations and so on, by basing their products on the needs their customers declare on the company blog and the demand they see for products and features in data sources such as Google search terms. Product development times are measured in weeks, rather than months or years. In one instance a spike in searches for netbooks resulted in a new product specified in one week and shipping a week later, a product which went on to become the biggest seller at Christmas a month or two later.

[[4]]Kogan Technologies[[4]]

Kogan worry about the decision – what products to offer – more than the data. Data is just something to feed the decision and can be sourced from anywhere, even Google search results. They worry about connections – the connection to their contract manufactures, their logistics suppliers, etc. – rather than trying to develop their own capabilities. They worried about how their ability to react once a decision had been made, rather than trying to collect the assets they need. The result is an astoundingly short time to market and the ability to pounce on opportunities when they see them. And they can release their product at price points that their traditional retailers impossible to compete with.

The challenge in this environment is to maximise your luck. How can you be more successful, more often, in a market who’s defining characteristic is its constant instability?

The first obvious strategy is to focus on your reactions. Tune your business so that it can pounce on opportunities when they present themselves, as Kogan did with the netbook. Constantly optimise the capabilities and information your organisation has access to (but doesn’t necessarily own) to create a company that identify and respond faster than its competitors.

The second strategy is to focus on your connections. Spread your influence far and wide so that you can spot proven ideas in one area and then quickly marshall the resources to copy them in another, as Amazon does as it evolves its portfolio of sales channels to ensure that there are they whenever you want to buy a product, whatever that product is. Rather than one business you have many, a constantly evolving portfolio of companies and capabilities.

The third is to focus on your decisions. Create singular products that reflect your unique take on the world around you, something that stands out from the crowd and make you desirable. Structure these products it in such a way that you break the sales cycle, avoiding distinct product iterations and marque features, so that current customers are more likely to simply upgrade which their existing product wears out, rather than engaging in a shopping mission where a competitor might grab their attention.

The challenge in today’s perpetually unstable market is how to optimise your luck; how to be at the right place at the right time, and with the right product, often enough so that it’s your product becomes a hit and not someone else’s. To do this you need to move from resources to reactions, from computing to connections, and from data to decisions. How your business fits into the landscape and business business community around is now more important than the assets under it’s control.

 

Posted under: Business-Technology, The New Instability

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