When Clayton Christensen was a newly minted professor at Harvard Business School and began his famous study of why companies fail, he took an unusual approach.
He wanted to look not just at any companies, but successful ones. The kind whose stocks were once high flyers and whose CEO’s graced the covers of top business magazines. Not the losers, but the winners who stumbled and fell. What he found was startling.
While he expected to see once great companies who lost their way, what he found was firms that followed all of the best practices taught at business schools like his. In other words, he found that technology shifts can radically change business principles. Today, as the technology continues to evolve, we need to take these four shifts into account.
1. We Think in Linear Terms, but Technology Moves at an Exponential Pace
Business schools teach us to be logical and methodical, but the truth is that we’re not as rational as we’d like to think. Executives need to make thousands of decisions and speed is important, so we take short cuts, relying on rules of thumb to fill in the gaps in our data.
Therefore, we often extrapolate, using personal experience to make common sense judgments. The problem is that today’s business environment is fraught with S-curves and non-linear digital laws, not the step-by-step advance that we experience on a journey in the physical world.
What’s driving the change is the increasing informational content of our products and services. We used to operate in an economy of atoms, in which value was created by transforming matter and energy. Nowadays, value is often created by design through informationally driven technologies such as CAD software, 3-D printing and genomics.
Technology pioneer Ray Kurzweil predicts that in the future, “all technologies will essentially become information technologies, including energy.” So exponential rates of progress will increasingly become the norm.
2. Scale Advantages Have Diminished
Banks used to be situated in large, ornate buildings that radiated size and power. The idea was that scale meant safety. Doing business with a big company meant that you could be sure that they would be around in the future and could stand by their promises. In those days, no one ever got fired for buying IBM.
That was then, this is now. Of the 500 companies on Fortune’s original list of the largest companies, only 71 were still there as of 2008 . Their scale provided little insulation from market forces. Meanwhile, companies like Google, Facebook and Instagram spring up out of nowhere, becoming billion dollar companies overnight.
That’s the essence of the new semantic economy. Upstarts can get access to resources that used to be available only to large ones. Whether it’s infrastructure in the cloud, outsourced manufacturing or capital from angels, VC’s and crowdfunding, very few industries still have significant barriers to entry.
About the only real advantage that incumbents have these days is the ability to hire lobbyists through trade associations and that is often more a sign of weakness than of strength.
3. Business Models No Longer Last
In the industrial age, a company’s business model didn’t change much. The way a firm would create, deliver and capture value could stay fairly constant for generations. The practice of management was mostly focused on execution. If you could move men and material efficiently, buy for a dollar and sell for two, you’d be successful, sometimes enormously so.
As Saul Kaplan rightly points out in his excellent book, The Business Model Innovation Factory, that’s no longer true. We have come to expect a number of upheavals in any given industry during the course of a career or even within a decade. With scale advantages disappearing, no one is immune. We all have to adapt.
What’s more, the process is accelerating. As technological cycles compress and planning cycles struggle to keep up, we need to experiment more and plan less. This is creating a strategic shift where strategy becomes more emergent, collaborative and Bayesian.
4. The Lunatics Run The Asylum
Way back in 1969, while hippies were making their pilgrimage to Woodstock and Niel Armstrong was preparing for his moonwalk, Peter Drucker was predicting the oncoming of a new age, which he called the knowledge economy, where managers would have to supervise subordinates who had expertise that they themselves lacked.
One of the key ramifications that he foresaw was that we have to treat almost everyone as if they were a volunteer. No amount of monitoring and auditing can suffice. Control becomes a dangerous illusion in a knowledge economy.
The result is we’re at the mercy of the lowest common denominator. No one cares what the CEO says in the annual report if the front line people aren’t performing well and making good decisions. Business moves too fast and is far too complex for rules and regulations to drive competent performance.
The lunatics run the asylum, the best that managers can do is help them run it right.
The Ramifications of an Information Economy and Accelerating Returns
While there is no lack of discussion about the digital age, I’m not sure that we’ve fully accepted the consequences of the transition from atoms to bits.
It’s not just that technology is moving faster, the rate of change is actually accelerating and that alters the logic by which we need to operate. Our intuition and experience lead us to assume a much slower pace.
Further, as the informational content of products and services increases, the economics change. While material and energy costs become less important, the information component is becoming exponentially more efficient. We’ve seen this in computer hardware and software, but now we’re seeing it in life sciences and even manufacturing.
Everywhere you look, efficiency is being automated. From robots in factories to pattern recognition software that automates analytical tasks, machine capabilities are replacing human ones in every area except one: our ability to interact with each other. That’s the essence of the new passion economy.
In a fully automated age, the only truly valuable asset will be the human spirit.
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Greg Satell is an internationally recognized authority on Digital Strategy and Innovation. He consults and speaks in the areas of digital innovation, innovation management, digital marketing and publishing, as well as offshore web and app development. His blog is Digital Tonto and you can follow him on Twitter.