Monday, October 22, 2012

The new buggy whip makers

Pity the poor buggy whip manufacturers.  Not only was their business disrupted by the advent of the automobile, but for over 100 years academics and business professionals have held them up for easy laughs as business people who missed a shift in the market.  If only, we tell ourselves, they had defined their business as "transportation starters" rather than horse annoyers, they might still be in business today.

Leave aside the arrogance and 20/20 hindsight that a broad historical view allows us.  There were a range of firms that experienced the transition from buggies to automobiles.  Some failed in the transition, and some were moderately successful.  But we are about to experience a period of disruption that will make the advent of the automobile seem like a small blip on the ever-upward progression of technological advancement.  And as this disruption starts, it will simply compound itself, accelerating over time as disruption builds on disruption, a sort of Moore's law of change.

Defense in Depth

Perhaps the best way to describe what's happening, and how it will unfold, is to describe it in military terms.  For decades most businesses have relied on what I'll call "defense in depth" - that is, the territory they've decided to defend is open and flat, and they are able to see attackers forming and moving toward them from a long way away.  This gave the businesses time to amass their forces and determine their defensive strategies and put in place enough offensive soirees to keep the attackers at bay.  Many businesses today are organized on a broad defensive strategy, defending markets and customers, building higher and higher barriers of entry and rarely attacking new markets.  This strategy relies on a couple of strategic givens:  that attackers are visible for a long time and must cover much of the same ground, that the attackers will require a lot of time and a lot of mass to attack, and that it is safer to defend than to be constantly on the offensive.

Guerilla Tactics

Anyone who is a student of warfare, from The Art of War and forward knows that the best way to defeat a larger enemy is to use his strength against him.  A guerrilla must do the unexpected, and attack in ways that the strong defender does not expect.  Mass and inertia must become problems for the defender, while the attacker chips away at weak spots or attacks in unexpected locations.

Change is the ultimate weapon

Which brings us back to the issue of the buggy whip makers.  They missed or failed to adapt to a disruption in technology when they were few and far between.  What is unfolding around us right now is a constant tsunami of technical, societal and political disruption unlike anything we've seen, and it's likely to continue.  Businesses, governments and societal institutions built for defense in depth will be disrupted, by smaller attackers acting as guerillas, but also simply by the rate and pace of change.  Think for example about these changes:
  • The unity and harmony of the Euro-zone.  Built over 50 years to reduce the likelihood of war in Europe, it may lead to either a fracturing of Europe or a tightly regulated and centralized Europe.
  • The "Arab Spring".  Tensions bubbled under the surface under dominant and totalitarian leaders in Algeria, Libya, Egypt and Syria for years.  No longer.  The state of play in every dimension in the Middle East and North Africa is up for grabs
  • Rapprochement with Russia.  Remember the "reset button"?  Russia is newly assertive and seeks to regain much of its former hegemony at the same time...
  • China seeks to establish itself as a major player in the Pacific
  • The US Government's ability to sustain borrowing 40% of its budget.   We have to get our own fiscal house in order
  • The impact of the internet on business, education and information.  The internet, by itself, has created significant shifts in retail, in higher education and in the availability of information.
These are just a few of the significant shifts happening simultaneously around the world and impacting every market.  If your organization is built to sustain attacks from slow, ponderous attackers and considers the terrain and environment as consistent and stable, you'll soon be held up as the modern buggy whip manufacturers.

Need proof this is already happening?

Do you wonder if these assertions are true?  There's an interesting graph in an article written for Forbes which demonstrates that the Return on Invested Capital over the last 50 years for 20,000 large US corporations has fallen from approximately 5% to just over 1%.  There are a number of reasons for ROIC to fall, but one is that returns are falling while invested capital is held constant.  Returns fall when businesses see their margins fall due to new competition, substitutes and alternatives, or when they can no longer command high prices.  All of these are signals that the firm is focused on defense and cost cutting while its market is shifting.

Firms that are innovating are taking the offensive, not content to rest comfortably behind defensive walls. They are creating new products that command higher margins, and forcing other firms to respond, rather than waiting for new products to emerge and quickly attempting to copy them.  This is why innovation must become a core capability or competence rather than an occasional activity.  When the average lifespan of a Fortune 500 firm is 15 years and falling, you don't want to build defenses, but build a firm and a culture that is constantly on the offensive.  The only way to stay on the offensive is to innovate, all the time and in every dimension possible.

The new core

Time was, efficiency, size and market share were the goals and innovation was a peripheral concept - nice when it works, but something attempted only sporadically.  With the amount and rate of change in the environment, innovation must become the core principle of the firm.  Once the firm is adequately structured to sustain innovation, margin, market share and efficiency will follow.  While this perspective may seem to border on paranoia, Grove was right when he said "only the paranoid survive". 

In the graduating classes of MBA schools around the country in the near future, professors will provide case studies of firms who became the new "buggy whip" manufacturers - those firms that missed the disruption and become obsolete overnight.  Many firms are currently candidates for that high honor.  Don't be one.  Stop talking about innovation, stop whistling past the graveyard.  You know the changes are out there and what they can mean.  Now is the time to take action to refocus your business and make innovation central to your strategy.
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posted by Jeffrey Phillips at 8:30 AM


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