Article for The Economist Insights
Businesses have always come and gone, but these days it seems that companies can fall from market dominance to bankruptcy in the blink of an eye. Kodak, Blockbuster and HMV are just a few recent victims of the rapid market disruption that defines the current era.
Where did these once iconic companies go wrong? To my mind, they forgot to keep challenging their assumptions about what business they were actually in.
Businesses have two options when they plan for the road ahead: they can put all their eggs into one basket, and risk losing everything if that basket has a hole in the bottom, or they can make a number of small bets, accepting that some will fail while others succeed.
Taking the latter approach, and making many small bets on innovation, transforms the boardroom into a roulette table. Unlike a punter in a casino, however, businesses cannot afford to stop making bets.
Business models are transient and prone to disruption by changes in markets and the external competitive environment, advances in design and technology, and wider social and economic change. Organisations that misjudge their purpose, or cannot sense and then adapt to these changes, will perish.
The sad truth is that too many established organisations focus most of their time and resources on executing and optimising their existing business models in order to maximise profits. They forget to experiment and explore new ideas for customer needs of tomorrow.
What business are we in?
Believe it or not, photography giant Kodak, which filed for bankruptcy in 2012, actually invented the digital camera. Steve Sasson, the engineer who created the potentially game-changing technology in 1975, was met with puzzled bosses who could not comprehend the future opportunity, or why customers would ever want to view photographs on a monitor.
Kodak’s business was optimised for developing photographs, not capturing memories, so the idea was not explored. Had Kodak built the capability to bring new products to market and evolve its business model, it could have led the digital revolution from the front. Instead, the reverse happened: after years of foot dragging, Kodak perished at the hands of competitors who had grasped the digital opportunity.
Contrast Kodak with Amazon, a company that was once dismissed as mere book seller. In 2008, it experimented with what is now Amazon Web Services as a way to operate IT infrastructure more effectively. It soon realised that the approach it was developing could be used to provide external customers with computing services. Six years later, Amazon is the company to beat in the cloud computing market.
Amazon’s willingness to flip a business model on its head can create runaway success stories, while stubbornly clinging to an established business model often signals an organisation’s demise.
As Amazon CEO Jeff Bezos notes, “What’s dangerous is not to evolve.”
These are no happy accidents
Winning organisations are continually experimenting, testing theories to learn what works and what does not. The reality is that fewer than one in ten of these new ideas or products will work, but the ones which do pass the litmus test could have a massive impact on the business’ future fortunes.
When exploring new ideas, here’s a five-point plan that businesses should follow:
- Support the culture of experimentation. The only failure is the failure to learn. Leaders are responsible for creating and defining this culture.
- Don’t just set up a big project, make lots of small bets. Ramp up successes and limit losses.
- Give your initiatives enough money to do something, but not enough to do nothing. Focus on frequent demonstrable value and validated learning before further investment.
- Create co-located, cross-functional teams to explore the problem space with end to end responsibility for the product.
- Continuously evaluate the performance of your initiatives and adjust the direction based on frequent customer feedback.
These ideas form the basis of Eric Ries’ Lean Startup philosophy. But they also provide a way to evaluate and start up large programs of work within enterprises. We discuss an evidence-based approach to enterprise portfolio and program management based on these principles in our forthcoming book Lean Enterprise by Jez Humble, Joanne Molesky and myself, Barry O’Reilly.