Great Moderates In History?

Jul 14

Evolutionary biologists have proven that the more adapted (i.e., comfortable) you are in your existing environment, the less able you are to adapt to environmental changes.Struggle is good for us. Rigidity is what organizations manifest when they are faced with either superior competition or outdated business models.This is the history of business. New ideas, inventions, and business models from the tinkerer in the garage change the world, while rendering obsolete the existing modes of production, infrastructure, and business models.The automobile replaced the horse and buggy, the calculator replaced the slide rule, and the personal computer replaced the typewriter, iTunes replaced CDs, and so on in a never-ending "perennial gale of creative destruction," as described by economist Joseph Schumpeter.Harvard professor Clayton Christensen writes:

Generally, the leading practitioners of the old order become the victims of disruption, not the initiators of it.

Change and creativity always take us by surprise. If it didn't, we wouldn't need it, because we could simply plan on it and incorporate it into our existing strategies and processes. Nassim Nicholas Taleb makes this very point in his book, The Black Swan:

We do not know what we will know. Invention and creativity is always a surprise. If we could prophesy the invention of the wheel, we'd already know what a wheel looks like, and thus we could invent it.

The professions, however, have been slow to adapt to the realities of an intellectual capital economy. Never before has this mentality been such a hindrance to success in today's rapidly changing, globalized marketplace.Business Model Innovation In a meeting with professor Clayton Christensen, former Intel CEO Andy Grove made the point "that disruptive threats came inherently not from new technology but from new business models." Perhaps this is why Grove titled his own book, Only the Paranoid Survive.I am defining a business model as follows:

How your firm creates value for customers, and how you monetize that value.

Clayton Christensen's partner in his consulting firm Innosight is Mark W. Johnson, author of the compelling book Seizing the White Space. He points out that most successful innovative business models are forged by start-ups.Johnson studied approximately 350 business model innovations in the past ten years, with more than 30 percent being enabled by Internet technology. Fourteen companies founded since 1984 have entered the Fortune 500 between 1997 and 2007 through business model innovation, including:

Amazon.com
AutoNation
eBay
Google
Qualcomm
Starbucks
Yahoo!

Thinking about the history of innovation, creative destruction, and business models in the context of professional knowledge firms, in combination with the radical business model proposed by VeraSage—from "We sell time" to "We sell intellectual capital"—the diagram provides an interesting look at where any firm can be at a given point in time. Since competitive advantages are built based on effectiveness, not efficiencies, I have chosen to highlight each as the axes of the diagram.Luddites: Firms that resist technological advances and other innovations that are merely table stakes risk being Luddites. They have both low efficiency in doing things right, and low effectiveness at doing the right things—not a bright future.Fortunately, not many firms are in this category. If you are here, you are dead already and the funeral is a mere detail.Buggy Whips: Usually when an industry is at the apogee of its efficiency, it is at risk of being made obsolete by new technologies or business models. As Peter Drucker said, no amount of efficiency gains would have saved the buggy whip manufacturers from the automobile.Innovators: As George Gilder wrote in Forbes, "Knowledge is about the past; entrepreneurship is about the future. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth."Innovators are firms that are willing to invest some of today's profits into tomorrow, while at the same time sacrificing efficiency for effectiveness.Innovation, creativity, and Total Quality Service are the antithesis of efficiency—ideas such as Google Time (where Google employees can spend 20% on innovation), experimenting with new ideas, investing in education, all reduce efficiency metrics.But if firms do not make these essential investments they are simply coasting on their existing intellectual capital, and in today's economy, knowledge becomes obsolete more rapidly.Humpty Dumpty: This is a precarious future. This represents firms that are highly efficient and effective.I am arguing if you are here, you better be sliding back to the Innovators position and start sacrificing some of that efficiency for innovation and making the firm more valuable to its customers.Humpty Dumpty eventually falls and ends up like the industries mentioned under Buggy whips. Efficiency is not the answer. Effectiveness is.Firm of the Future or Firm of the Past?Embracing a new business model requires leadership and vision. It requires knowing you are doing the right things, not just doing things right.It requires focusing the firm on the external value it creates for the customer and simultaneously building the type of firm people are proud to be a part of and contribute to—the sort of organization you would want your son or daughter to work for.It requires a sense of dignity and self-respect that you are worth every penny you charge, and you will only work with customers who have integrity, whom you enjoy, and respect.It requires an attitude of experimentation, not simply doing things because that is the way it has always been done.It requires less measurement, less fear, and more trust. It requires boldness and risk-taking—there has yet to be a book written titled Great Moderates in History.As science fiction writer William Gibson quipped, "The future is here. It's just not widely distributed yet."Skeptics will call for an incremental approach, which is how they maintain the status quo.But how will these optically challenged skeptics make incremental changes to an existing business model that is already dying? By making it incrementally less dead?The late economist John Kenneth Galbraith wrote, "All successful revolutions are the kicking in of a rotten door," not—I would add—merely oiling the hinges to make it swing more efficiently.There is no limit to what we can achieve, as long as we do not lose faith in ourselves. It is the difference between remaining a firm of the past, or, like a chrysalis, emerging as a firm of the future.The choice is yours.