Friday, November 20, 2020

Preparing for the Roaring 20s

 One of my favorite quotes is from a philosopher named George Santayana.  He said that those who cannot learn from history are doomed to repeat it.  I think we are at the cusp of repeating the past, so it makes sense to review a similar episode in our past so we can better prepare for the emerging future.

A quick look back, about 100 years ago, would suggest that our populations and economies may be on the brink of repeating the Roaring 20s.  Only this time it won't be Gay Paree, flappers and jazz music celebrated by World War 1 veterans.  It will be an entirely new crop of veterans - young adults who have been locked down in COVID induced misery, who bear some economic and psychological scars, and who have lost time and loved ones to a deadly virus.

Mark Twain also had something to say about history.  He said history does not repeat itself, but it does rhyme.  I think he meant that many of the characteristics of the past recur in our present times, in similar fashions if not in exactly the same way.  What I am calling the Roaring 2020s may demonstrate that rhyming characteristic that Twain described.

Why the "Roaring 2020s"?

The original Roaring Twenties were a result of the end of the First World War, the end of the Spanish Flu pandemic and a reaction to an economic depression that followed the war.  Millions of veterans returned home to live new lives. Some experimented with new lives in new locations.  One of my favorite books - The Razor's Edge - describes a young man who was injured in the war and it changes his life and perspective forever, much to the dismay of his friends.

In those days, attitudes and perspectives were radically changed.  The old hierarchy was being challenged.  Governments and generals - entire generations of leadership - were being called into question.  People did not want to live the lives that had been originally set out for them. After living through the war, people threw off the old ideas and expectations and lived out loud.  It was a short boomlet in reaction to the previous conditions that ended in the Great Depression in the late 1920s.

I think we are primed for a new Roaring 20s, which will be ignited by the wide distribution of a COVID-19 vaccine.  Like many of the people in the 1920s, we will emerge from a long period of turmoil and lockdown, ready to get out from under the unrelenting pressure of the virus and the lockdowns it has created.   

What are the parallels?

The original Roaring 20s were sparked by young people who were ready to live an entirely new life, tired of war, disease and old ways of thinking.  They live life to the max, breaking with traditions and creating new music, new literature and new fashion.  At the time, many older adults felt the younger generation were living too fast and too loose, too ready to toss away convention.

I think by July or August, 2021, we'll see much the same thing occurring.  The Millennials and Gen Z feel, rightly or wrongly, frustrated by difficulty finding new jobs even in the relatively booming economy in the late Obama and early Trump administrations. Further, they and others have had opportunities denied to them by the COVID outbreak.  They (and frankly a lot of the rest of us) are anxious to get out, go out to eat, to go to a ball game, get together with friends, travel and explore.

As vaccines demonstrate their effectiveness, and travel bans are lifted, we may see an explosion in the consumer market.  The most obvious places to watch for this are airline and hotel bookings.  What's even more interesting is how attitudes and behaviors about work and careers may change.  There were already rumblings that the younger generations have a very different attitude about work/life balance than the Boomers and Gen Y.  Many have experienced the gig economy and working from home and may want to work to live, rather than live to work.

Some simple predictions

If we play out these ideas, several scenarios are possible.

First, the travel and tourism industry could explode in the second half of 2021.  Destinations could be less important than the simple desire to go somewhere, anywhere, and experience something new.

The workforce participation rate, already declining due primarily to the fact that women are leaving the workforce to care for children, may decline some more as people decide to live life and put college or careers on hold for a year or two in reaction to the pandemic.

More people decide to start their own companies, in order to have more control over their lives, to work where and when they want to, rather than working for a large bureaucratic company.

Consumption follows a forked path, with some people deciding to live a much simpler life, and others deciding to live and spend as much as possible, since the future may not be promised to them.  Our consumption-driven economy may experience some fits and starts as it adjusts to a barbell-shaped economy.

Fewer people decide to attend four year colleges.  The cost and eventual benefit of a four year education simply does not align for many people, who will pursue other opportunities.  Traditional college and the value of the experience of residential colleges has been questioned for years, and COVID demonstrated that some people can get as much value from attending virtually.  College costs will have to stop rising for more people to believe there is value.

Governments may need to rethink how they raise funds.  In the US, we have income taxes, sales taxes, capital gains taxes but few consumption taxes.  When people are more open to new work and new experiences, income taxes may not be the best way to maximize tax policy and revenue.  Instead it may make sense to alter our tax policies to consider consumption taxes, to encourage people to think about what and how they consume, rather than what or how they make their income.

Getting ready for the deluge

I can't tell you exactly when this will happen, but I feel fairly confident it will happen.  I moonlight as an adjunct professor in a graduate program, and I can tell you that my students are ready for change.  They are frustrated that they cannot control their lives, cannot travel and cannot find good jobs, and when the situation changes I expect they will want to celebrate, at least for some period of time - say a year or two.  We may not see an instantaneous change in the economy or in markets, but I think it will happen, and we'll really experience it by the beginning of 2022.

AddThis Social Bookmark Button
posted by Jeffrey Phillips at 7:17 AM 0 comments

Tuesday, November 10, 2020

Most good innovation is offensive

 If you are a football fan, the way I am, you know the old adage:  defense wins championships.  For years, decades even, defense held sway in the coaching ranks.  Everyone seemed to believe, and it was often proven out, that the teams with the best defense would win the championships and the Super Bowl.  There's another phase you'll often hear:  the best offensive is a good defense.

With this in mind, many teams and coaches built strong defenses and just OK offenses.  Over the last decade or so, however, rules were adjusted and new offenses emerged that proved that good offenses will often beat good defenses.  No longer is football a game of "three yards and a cloud of dust". Even in the college ranks we are seeing games where the aggregate score is often over 80 points in a game.  Needless to say, good offenses (and the rules changes that made them possible) now hold sway.

This represents a classic tension, between a proven, safe, conservative approach and the more aggressive, risk taking approach.  Strong defenses and safe, patient offenses are the conservative approach, winning with better field position and stopping the other team's offense.  Most coaches and teams have practiced a conservative brand of football. In the same fashion, many corporations play defense, and have very conservative management philosophies.

How executive management is like football coaching

While many coaches in the NFL are happy to manage the game, control the other team's offense and work their way patiently down the field, winning with small margins and field position, the same can be said about many executive teams in corporations.  The game is actually easier to play in large firms, because the bar for "winning" is set by the company through a whisper campaign about revenue and profits.  Then, the company merely needs to meet the goals it has set for itself.  You'll rarely see a company miss its numbers to the good or to the bad to any great extent.  If a company is going to exceed its numbers, it will hold some of that revenue back for the next quarter, just in case.  A company that cannot meet its own whisper numbers over several quarters (outside of an epidemic like COVID) will soon have a new management team.

With this in mind, it pays to play it conservative and safe, building on existing foundations and rarely straying from safe models and channels.  In other words, managing like a defensive minded coach in football.  So you can see why most innovation is incremental, building on existing products and channels, rather than disruptive or transformative, because that innovation becomes offensive and risky.

Why innovation is offensive

Innovation seeks new opportunities, to address emerging needs, customer and markets.  It is inherently aggressive, risky and growth oriented.  Rather than building on existing foundations and channels, it seeks to create new opportunities and new ways to engage with customers.  Therefore, it is offensive-minded, and runs head-long into a defensive minded mentality in many corporations.

Which is why I say innovation is often offensive (in multiple senses of the word).  It is offensive rather than defensive minded, meant to win new markets and opportunities rather than protecting and defending existing turf.  It is offensive to those who prefer a more defensive mindset, because it introduces risk and uncertainty.

Why the NFL changed

The NFL looked around about a decade ago and realized it was losing viewers to other faster paced, higher scoring sports like basketball.  Defensive games where the teams push each other around in the middle of the field may be tactically interesting, but fans want scoring.  New players and new rules have created the opportunity for far more scoring.  In the NFL, becoming more offensive minded was a reaction to the marketplace.

In corporations, there is a strong preference for managing and controlling, playing it safe, so a strong bias toward defensive-minded thinking.  While the market does reward innovators - those who are more offensive minded - the risk to reward ratio is not large enough for many firms and executives to shift their thinking.  Most true innovators in the corporate world come from the two ends of the success spectrum:  they are either far ahead of competitors and can afford the risk, or behind competitors and risky actions are all that's left.

Why companies remain defensive minded

And the key point in that last paragraph is "shift their thinking".  An NFL team needs only a new coach or owner and a few new players to shift the emphasis from defense to offense.  A corporation needs a shock to its systems, a top down philosophy change that changes not only management and compensation but also the inherent culture.

And if culture is a determinant for innovation, then it should be relatively easy to see which firms can innovate or have the capability to make shifts to more offensive minded thinking, and which will remain defensive minded until forced to change.

Further, being defensive minded is easier and more straightforward than being offensive minded.  In a defensive stance, you must defend what you already have, protecting familiar customers, markets and channels.  You compete on ground that you know.  In an offensive action, you compete on new ground, with new competitors and for new customers that will be unfamiliar to you.

Lastly, inertia makes it easier to compete over the same ground and for the same customers rather than reaching new markets and customers.  At some point in every company's life, the legacy of past experience and the amount of inertia that builds up makes it difficult to do new things.

Innovation can be offensive

For these reasons and many more, I think good innovation is often offensive.  Disruptive and Transformative innovation seeks to solve unmet needs or address customers who aren't happy with existing products and services, or who aren't served at all.  That means going beyond merely protecting the status quo.  It means going on the offensive.

And, since innovation introduces risk and uncertainty, the mere action can be a bit offensive to those who prefer safer bets and less risk.

AddThis Social Bookmark Button
posted by Jeffrey Phillips at 10:19 AM 0 comments

Wednesday, November 04, 2020

I don't want to live in a Ready Player One world

 I'm working with a startup, focused on the future of nutrition.  This is not my first startup, or as we used to say in Texas, my first rodeo, and I doubt it will be my last.  I've had the good fortune to work in several startups that had different trajectories.  One, a consulting firm, grew rapidly but never went public.  Another software firm I worked with got just big enough to get acquired by a larger company, and yet another software company received funding from Softbank but failed to get another round just after 9/11.

I have a small book about these experiences that one day I'll get organized and published.  But what was relatively common about these experiences is that the ideas were relatively scalable.  The software ideas are of course almost infinitely scalable, while consulting is somewhat scalable.  In the past, when selling time by the hour was popular, consulting firms could not get enough people to join.  Now, of course, consulting is shifting its business model, looking for revenue streams outside of the billable hour because the model is no longer deemed scalable.  But all of these ideas seem scalable when you consider what it takes to scale a physical idea.

Tangible versus intangible assets

Software is scalable because I can license it or provide it as a service to as many people as I can find that need it.  With new cloud services, I'm no longer constrained by IT or to some degree even by human assets.  Eventually, software will provision itself, and even sell itself, so two of the biggest issues for scalability will be reduced.  With AI, it's possible that even much of the support necessary for software will be conducted by machines rather than people.  Think the person on the other end of your chat sequence is friendly?  Dollars to donuts it's a chatbot.

Intangible assets and ideas are scalable because they don't require a lot of work to sell, to provision, to implement or to support.  A fully automated, self-provisioning and self-service software application hosted on servers in the cloud is perhaps the best example, but there are more.  Tangible assets and ideas, on the other hand, can lack scalability, and increasingly I think big, physical ideas will become increasingly more difficult to imagine, fund or implement.

Impact on innovation

This idea of the significant difference between tangible and intangible ideas and the challenge of innovation is deeply concerning. What it means - and what we are seeing - is an increasing focus on innovation in intangible ideas, and less and less innovation in tangible ideas, assets and products.

While this is great for industries like gaming, financial services and software, it becomes a big issue when people need tangible products and services.  As companies look for a quick way to gain new inexpensive revenue, innovating around intangible products and services promises less investment and faster returns than innovation around physical products.

So, what we are increasingly left with is better and better intangible offerings and less choice and less value in the physical products we acquire.  Have you noticed how poorly designed and manufactured many products are?  Why invest in engineering, design, manufacturing and quality parts when the products are break even at best?  IBM didn't decide to split into two businesses for any other reason than the hardware side is rapidly becoming a commodity, but the software and cloud side of the business (intangibles) could have a bright future.

Tangible innovation is difficult

It's not just that intangible innovation is easier to do, it is also easier to realize.  Intangible ideas are usually software based, and while good developers are at a premium, software is still relatively easy to build.  Contrast that with the challenges of building say, a new car or a new medical device, where safety concerns, manufacturing, engineering and many other constraints and requirements come into play.  Plus, if the tangible products must fit within an existing infrastructure and work within accepted norms then the range and scope of innovation is narrowed and innovation becomes even more difficult to do well, and is easily copied.

And, even after you have a tangible idea, the ideas have to work their way into product development streams where they face competition from limited resources and other existing products.  It's often easier to re-use existing systems or components and sacrifice some of the differentiation for lower costs and speed to market.  And, once in the market, you still have to sell these products to consumers in a more traditional sales cycle.  There aren't too many tangible products that are available for free when you watch the advertising.

But not everything can be software

In the end, though, some level and amount of tangible innovation is required.  We can't (at least not yet) wear or eat software.  We can't transport ourselves using bits and bytes.  No matter how good Microsoft and Amazon are at cloud services, we can't all live in data houses.

This means that we innovators need to start creating programs and pathways that make tangible innovation easier, more practical and more affordable.  There are plenty of innovation opportunities in the tangible world, and none of us want to spend the rest of our lives cutting the costs of existing tangible products (and getting less and less value from them) while optimizing and innovating the online experience alone.  

If we keep going at the pace we are moving, we'll end up a little like the people in Ready Player One, who live in hovels but spend all their time jacked into video games. 

AddThis Social Bookmark Button
posted by Jeffrey Phillips at 3:02 PM 0 comments