Monday, August 23, 2010

Speed over constancy

We are in the midst of a paradigm shift in the way we think about our businesses.  In a previous post I argued that the efficient use of ideas would become a new mantra, similar to the efficient use of capital.  I think that's true because it appears we've extended the concept of financial engineering and the efficient use of capital about as far as it can go.  Additionally, we've reached the point where we aren't creating any new value with the financial assets at our disposal.  But that's not the only reason for the paradigm shift.  Along with the exhaustion of the efficient use of capital comes the increasing pace of change. 

Now, the fact that the pace of change is increasing is not news to anyone, but the impact it will have to our business models and the way most businesses work is dramatic.  Traditionally we've planned for long product or service development cycles and long lives for our products and services.  It was taken as a given that most products would have a lifespan of many years or even decades, and that these products would create profits over the majority of those years.  The tradeoff of a long investment in R&D and product development was a protected revenue stream over many years.  For many reasons, the long-lived profitable product or service is falling by the wayside.

Any firm in any corner of the globe can complete with any other firm.  Aggressive competition by firms that don't feel the need to create new products and services - those that simply mimic existing products but drive down costs - is growing.  That fact means that the days of long, profitable products and services are over.  Any product can be quickly copied and delivered to the market, in some cases in just a quarter or two.  Many countries that were once only able to mimic new products and brands are rapidly industrializing and moving quickly to create innovative new products and services of their own.  This introduces a two pronged effect: your products and services are being copied and provided at less cost, and new innovations are being developed and presented to your customers as never before.

This loss of the long development cycle and long product life cycle means that firms must shift their strategies from long, arduous research and development cycles to more rapid understanding of customer needs and delivery of new products and services.  It also means that firms must have more products and services in the innovation and development pipeline than ever before, and must launch more new products and services to keep pace with demand and competition.  More profits will be attained in a shorter period of time as a firm plans for competition and obsolescence over shorter product life spans.  This, in turn, reinforces the need for the efficient use of ideas, which will drive new product and service creation.

Trying to stick to a long development cycle coupled with a long product life cycle is probably risky, given the intense competition and the increasing pace of change, not to mention fickle customer attitudes.  One comment I hear constantly within the management ranks of the firms we work with is "...when things get back to normal..."  What we all have to realize is that we are defining a new normal, which may take several years to shake out.  That new normal may reflect a US population less likely to spend and more likely to save, and a growing BRIC population ever more interested in spending and acquisition, just as a few examples.  Any firm that assumes its existing business models and methods will sustain it through this period of change is missing an opportunity for renewal.  Now is the time to determine the new business models, use of insights and ideas and to recraft internal processes to become more nimble, more agile and more innovative.
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posted by Jeffrey Phillips at 6:08 AM


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