Thoughts on the accelerating evolution of business models

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Thoughts on the accelerating evolution of business models, and the related psychological stages / ‘fear levels’ that we go through

In the past, economics, life and business evolved at a slower (than today) pace. At the time (then) it didn’t feel like it, but then we didn’t really know what was coming.

Today it feels like are we are traveling at speed on the motorway, with our head out the window, having only last week been enjoying leisurely drives down picturesque country lanes. The chances of a life endangering crash are now higher; you get to take in less of the surroundings as you hurtle along, but there’s still the thrill of the ride, while it lasts.

While we need to concentrate on the driving, it is important however still to be clear on the next part of the journey – hence (away from the analogy!) one needs to consider how the increasing pace of business and economic change is impacting one’s future development.

Looking back

In the past, as industries have arisen, value chains developed, groups and individuals eventually found roles, and accepted their return, reward, risks, and responsibilities for their respective roles – some accepted that they would earn less, despite sometimes working very long hours, while others earned more, sometimes also for long hours, sometimes less. Much of the difference was justified (rightly or wrongly) by “that’s life” – driven by intellectual/social superiority, and wealth.

The mix rarely changed, and if you settled in one wealth ‘class’ then you’d have good chances of staying there or thereabouts; furthermore, there’d also be good chances that you’d be able to give your children similar chances, through your social connections, your wealth, and your own knowledge and experience. It wasn’t great for all, but whatever it was, it usually was.

Periods of transition beginning

In mature, typically Western nations middle-classes grew significantly (and more recently in some emerging markets also), creating a relatively ‘comfortable’ space between the working class (a large group that worried about making ends meet) and the upper classes (a smaller group, who dominated society and politics).

In many ways, this picture hasn’t changed (yet). There is however currently talk of declining middle classes (especially in the USA), and a widening gap between the rich and poor. I don’t want to get into theoretical discussions of class systems, or the pro’s and con’s of capitalism (not in this post at least!) – rather, I’m keen to brainstorm thoughts on the impact of some of these developments on society.

Today, and the multiple universes ahead of us

Today however it seems that through increased transparency (driven in part by greater online access to news and information, as well as more social sharing of information online), as well as declining optimism for growth from many traditional business models, more people are willing to challenge the status quo.

The search for excellence has resulted in more people and more businesses achieving ‘good enough’ (and let’s be clear, expectations are still high, but perfection is not always needed, so ‘good enough’ can still be ‘great’) – this has resulted in greater difficulty in differentiation, and even greater need to innovate. But innovation is difficult, and the low-hanging fruit are usually already taken.

For established businesses, the remaining innovation opportunities tend to require transformational, not incremental change – such transformational change however can require decisions which send one in two different, mutually exclusive directions (do or don’t, left or right), and so many are fearful of taking these decisions. But the killer is, not taking the decision is also a decision, indirectly, and often the worst one, since then control has been forfeited (“When you don’t know where you want to go, it doesn’t matter which path you take”).

Of course, transformational change doesn’t have to be a way of life, a continuing upheaval, rather an openness to understanding when the current model has passed its peak, and is approaching expiry or stagnation. Once that moment has arrived (and it can be well before ‘the end’, whatever that might be construed as) one should start to make plans.

Working through the fear levels (not chronological, but psychological)

Fear level 1 – It’s a challenge, but we’re doing fine

  • Many people and many businesses believe that they can continue (or want to continue) to act in the same way – this is not about being lazy; they are often interested in fulfilling their maximum potential, and improving themselves, but don’t see the need for, relevance or value of transformational change.

Fear level 2 – It’s happening to others, but not us (ie, denial)

  • There are some classic cases of those needing to make transformational change (eg, Kodak needing to react to the arrival of digital photography), as well as some well-known struggles (eg, media companies response to digital music: MP3s, etc.), but for other businesses not subsumed in these oft discussed struggles, there is likely still some element of challenge ahead. It might be from globalization and arbitrage in labor rates, or it might be from changing competitive environment, changing customer or supplier power (eg, though changes in ‘their’ value chains (note, also your value chain)).
  • Increased communication and networking, governance matters, as well as competition in a sector, after quality and product/service innovation become only incremental, often result in increasing transparency in pricing and costs (together, your margins) and your business model – once others in the value chain see that, they will look to you to maximizing their own share of earnings (often since they are struggling to maintain their own margins, or find further growth opportunities to meet the expectations of their owners).

Fear level 3 – We can improve (still denial?)

  • This “competing for the pie”, instead of “growing the pie” in a sector initially drives efficiency (sometimes the last option), but is eventually futile for all involved, until (if) someone goes for broke, and tries the transformational step.
  • Maybe it is normal that such tactics are employed during an economic downturn, when confidence is low, and growth forecasts are pessimistic relative to historical trends. It is however different this time (it’s always different!) – this time we face new opportunities in the world of online communication/networking, and globalization, which can’t be underestimated. They are shaking up the value chains of almost every business. Even some of the businesses that have historically been the least transparent to the general public (in particular banks and other financial services organizations) are garnering their attention (not least because of their reported involvement in sub-prime lending, and its resulting impact on economic development, even if that might only have been the trigger for something larger).
  • Virtually every business model is today under some sort of pressure to adapt, and usually sooner, than later (if you don’t someone else will). Many people assume, usually wrongly in my mind, that they can ‘improve’ themselves out of the need to adapt.

Fear level 4 – We’ll do something significant! (attempting to break free of denial?)

  • It is this conundrum, that is causing the fear over maintaining one’s remuneration, one’s profits or one’s status, not least because of the potentially accelerated way in which the change can suddenly happen. The key question then is: “What is the reaction?” – do more of the same but better, or do something transformational?
  • Often it is the former, which you could reason as a lack of vision, a fear of change, or even a lack of options (but how often is that really the case?). Doing more of the same might in fact temporarily address the situation, but if others do the same, the competition just goes around another cycle, until the question is asked again.

Fear level 5 – Arrival of the disruptors (can we beat them to it?)

  • It is also at this stage that industry sectors might become at risk of ‘disruption’ from a new entrant, possible even a small start-up that looks at the opportunities from technological developments in different ways, and can garner capital from a venture capital house or similar.
  • Worryingly for stagnating or slow-moving sector incumbents, these disruptors might end up competing in a way that is very difficult for the incumbents to replicate or respond to.

Conclusions

In my view, one of the best ways to beat the disruptors is to join them – ‘disrupt yourself’. Therefore, think and act like the disruptors do (possibly more on this in a later post), and (maybe) buy them, but recognize that they might not be like you, and so integrating them into your existing business could be a challenge.

For large organizations this can be a cultural or even administrative challenge however, so it is likely best to start as soon as possible.

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3 Responses

  1. Some further reflections on why I wrote the above:

    The topics raised are not so much through consideration of any specific party, rather more generally – I think it is natural, and important, to have an interest (but not necessarily fear, or worry) in the development of society.

    These messages resonate with what I have recently been reading around global economic development, social development, and business development (through a mixture of mainstream sources, like HBR, The Economist, New York Times, etc., and more individual perspectives (via blogs, twitter, etc.), including also various think tanks, professors and authors. You’ll find many of them in the list of people that I follow on Twitter, if you care to look.

    It is therefore a snapshot of a ‘current perspective” that I have curated, contrasting topics raised by others, and added my own thoughts: sometimes summarizing, challenging, extrapolating, and postulating.

  2. Great post, Matthew.

    This chimes with something I see a lot when working with companies to help them make these transformational steps. There are several trends contributing to the increasing speed with when change is happening, whether technology, globalisation, interdependencies, or complexity.

    A paradigm shift many of our customers are coming to terms with is that the business environment no longer consists of disruptive episodes interspersed by plateaus of growth (allowing a relatively smooth gathering of economic rents).

    Rather nowadays, change is the constant, meaning organizations able to rapidly adapt to changes in the business environment as the overriding capability defining successful companies.

    Cheers
    Dave

  3. […] I mentioned also in a previous post (‘Thoughts on the accelerating evolution of business models’), the world seems to be changing fast (and accelerating in the past of change). I believe this […]

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