Last week I was lucky enough to present the keynote at Oracle Modern Business conference in London. I used it to test some thinking that's emerged from client work over the last few years. I've been gathering data around it and applying the ideas in real businesses... needless to say that there's some promise there.
The central thought is that dinosaurs were once unicorns. Rather than the common rhetoric that the latter are intrinsically better than the former, I wonder whether unicorns should actually aspire to be dinosaurs and seek to learn from them in the same way that big organisations seem desperate to sip some unicorn-flavour Koolaid in the Valley. Anyhow, here's the transcript of my speech. Hope you find it interesting.
The central thought is that dinosaurs were once unicorns. Rather than the common rhetoric that the latter are intrinsically better than the former, I wonder whether unicorns should actually aspire to be dinosaurs and seek to learn from them in the same way that big organisations seem desperate to sip some unicorn-flavour Koolaid in the Valley. Anyhow, here's the transcript of my speech. Hope you find it interesting.
Disruption was an
exciting new concept when I started my career. It was much like Lean Startup is
today: if you felt that you understood it, you were in an exclusive club
possessing of knowledge that could topple empires.
Disruption is daring,
a tale of David and Goliath in which an innovation creates a new market and
value network, destroying the existing market and value network, displacing
established market leading firms, products and alliances, typically with
terminal results for those incumbents.
Those incumbents are
the dinosaurs, great lumbering beasts just waiting for the asteroid.
Today we’d see a
business that disrupts really well as a unicorn: a mythical value creature that
investors scramble over to get a piece of. Unicorns are faster and leaner than
dinosaurs. Their culture of flatness and risk taking makes them deadly
competitors, even if they only have one horn.
I’ve long believed
that there is truth in this, that the cultural norms of the Digital Economy are
more effective than the management norms of the Industrial Economy, which are
based on hierarchy and control. So I set out to prove this in a two year study
with London Business School.
Our research used the
banking sector – incumbents, challengers and potential disruptors – as a base.
It wasn’t conclusive, but it does suggest mathematically that digital native
businesses are substantially more productive than incumbents.
The question is
whether being more productive is enough. Many people seem convinced. The common
rhetoric I encounter in our own organisation is that the rate of change is
accelerating, unicorns will triumph and we are entering a post-dinosaur world.
As with everything
these days, there are facts and there are alternative facts. I have come to
believe that the common rhetoric is a lazy rhetoric. My research suggests that
unicorns and dinosaurs will largely peacefully co-exist and that both have much
to learn from each other.
Let’s talk about the
life of dinosaurs. As we learnt in school, these are majestic beasts with huge
teeth and claws. None of my friends were interested in the little guys, so
we’ll continue with that bias today.
Companies have been
around since the 16th Century, but
their ascendancy in economic terms began with the widespread growth of public
companies in the late 19th Century. It’s not actually all that easy to get data on these early
organisations. Much of it is buried in ledgers in public libraries or in books
with gripping titles like ‘Scale and Scope, the dynamics of industrial
capitalism’.
But if you’re
persistent then you can find it and with it a treasure trove of information
about the way in which both unicorns and dinosaurs evolve.
The figure above is a distribution that shows the age of large organisations at the point
that they went extinct. By extinct I mean bankrupt, dissolved, eaten by a
competitor or deceased in some other way. And these are important institutions
– all of were part of the Dow Jones Industrial Average or were members of the
S&P 500 or FTSE 100 from the 1880’s to the present day. Importantly, this
is a data set that covers the last economic system change: electrification.
Looking at the peaks
tells you something interesting about the points of danger in an organisation’s
life. And the first danger is in their unicorn-dom.
The data suggests
that large organisations are about 35% more likely to fail in their first 10
years than the average. To put that into perspective, at the time of writing
there are 185 Unicorns – privately funded companies with a valuation of more
than a billion dollars. 75% of them are less than ten years old.
So what's causing
this spike in the death rate? It’s important to recognise when considering the
death of unicorns that dinosaurs were also once unicorns. Although a very small
number of organisations gradually build over time into mega-corporations, the
vast majority of big businesses started out causing or riding a wave. They grew
explosively fast by creating new industries like automobiles, aeroplanes,
electrical factory equipment, typewriters, software and so on.
That rush is a really
dangerous period. Yes, it’s exciting, but in a rush to grab newly emerging
demand those that fail over-invest in areas that do not build lasting
competitive advantage and as their market inevitably begins to slow they are
left with a cost base too great to be sustainable. In the old days we’d have
said that they were too ambitious. Post lean-startup we’d probably say that
they’d failed to validate whether they could make money as they scaled.
Let’s go back to the
chart.
There’s two big
spikes in the middle, between 80-90 and 100-110. Companies at this age are in
real peril – 140% more likely to go extinct than the average. The ‘why’ is
two-fold and strongly related to the time period covered by the data.
That time period
covers the Industrial Economy and about ten years of the early Digital Economy,
in which the introduction of digital computing as a new general purpose
technology led to another surge in innovation output.
What you’re looking
at here is the gradual decline of Industrial Economy business models over a
long cycle. When you look in detail you see that the demise of these dinosaurs
was generally a legacy of doubling down on non-differentiating infrastructure
by Managers who’d grown up on the scale economics of the preceding hundred
years.
It's important to
realise that this generally isn’t an asteroid. Disruption is a small part of
the story, but by no means all of it. The economist Paul Ormerod has done
fascinating work on the effect of disruptive shocks on businesses. This chart
shows one of his many analyses, demonstrating that throughout history shocks
have led to extinction, whether there is disruptive change or not.
Doubling down on an
existing strategy at a time when the world is changing is much the same as the
failure mode of unicorns.
It turns out that
it’s not at all easy to innovate and grow fast. And it’s not easy to change
tack and change modes into optimisation. Survival is a process of building
layers of complementary physical and intangible infrastructure that maintains
the efficiency of scale while providing a springboard for investigating
possible future infrastructure layers.
There’s a way of
thinking about it that I’ve found effective with the businesses I work with.
It's not a silver bullet, but it is a useful framework for transforming the way
they think about their market and their operations.
This model entails
rethinking the organisation as an interconnected set of engines, each managed
by different metrics and with distinctly different functions. These are not
unitary structures – organisations can have many of each and crucially they
partner for many more.
Let’s start from the
top.
Commissioning engines are the quarterback for the system. They maintain a world view that
enables everyone in an organisation to go broadly in the same direction and
trigger migration from one type of engine to another based on, amongst other
things, the growth rate of their key metrics.
Invention engines come up with new ideas and technology in isolation of application.
These are often pure research organisations and thus are more than likely to be
outside the direct control of your business.
Innovation engines systematically take ideas from invention engines and apply them to
business problems dictated by commissioning. They demonstrate problem solution
fit and then pass to…
Commercialisation
engines, which operate a lean startup process of build,
measure, learn cycles that establishes product-market fit for an innovation, be
that a process change or a new venture.
Scaling engines begin the process of migrating a startup venture onto a more
sustainable footing. They balance growth rate with putting in place infrastructure
– remember that means working practice as well as physical and tangible - that
will work at 10X size.
As growth begins to
attenuate you need optimisation engines. 80% or more of the typical
business’s resources are in optimisation engines, which are set up for slow or
even negative top line growth and thus focused on systematising innovations
that enable productivity to remain high.
Underpinning
everything is a decommissioning engine. This doesn’t just sense when
something is no longer performant and needs to be removed from the portfolio.
It also triggers invention and innovation by detecting business problems that
are emerging from operating. If you like, it looks inwards while the
commissioning engine looks outwards.
This all sounds
fairly hypothetical and even a recipe for chaos. It actually works really well
operationally because it does two things. First it requires the use of data
around every process in an organisation. Processes drive outcomes. Outcomes
need to be meaningful in order to be pursued.
Secondly it
disconnects outcomes from domains. The people, process and technology of an
organisation should be directed at outcomes at a life stage, not consolidated
by nominal domain.
Finally it focuses
the mind on the engines that an organisation needs as it evolves rather than
the engines that are making it successful right now.
In other words the
future of business as I see it is a hybrid: the scale and solidity of a
dinosaur and the magical growth powers of a unicorn.
I suppose we could
call that a rhino.
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