Thursday, December 3, 2009

Strategies to create friendly futures.

Post 380 - The third way for businesses to grow and succeed today is by creating intuitive futures. Here, you gain sustainable competitive advantage by finding patterns that connect different elements of your business in new and original ways, or by inventing elements that can be used to create new and unique patterns not previously in effect. Here, innovation and speed win the day.

Competitors often wait to see if new business models will be successful before attempting to copy them, thus providing innovators with a very profitable time while they have first-mover advantage. In addition, if you can incorporate new elements that will take a long time for competitors to copy (e.g. patented technologies or new capabilities), you build in a sustainable competitive advantage. When this is part of an integrated growth strategy, by the time everyone else catches up, you'll have introduced yet another difficult-to-replicate innovation, thus retaining the position of leadership in your industry.

Successful companies today are simple, small, speedy and strategic, and aspire to be global, lean, fast and smart. The challenge is to add speed and capability without adding complexity. When creating the future, the real voyage of discovery isn't in creating new structures but in seeing the world with new eyes. Great strategies come from understanding what’s happening in the world in totally new ways.

As an example, Netflix has made a good business out of what's unprofitable fare in movie theaters and video rental shops because it can aggregate dispersed audiences. It doesn't matter if the several thousand people who rent Doctor Who episodes each month are in one city or spread, one per town, across the country - the economics are the same to Netflix. It has, in short, broken the tyranny of physical space. What matters is not where customers are, or even how many of them are seeking a particular title, but only that some number of them exist, anywhere. As a result, almost anything is worth offering on the off-chance it will find a buyer. This is the opposite of the way the entertainment industry now thinks. Today, the decision about whether or when to release an old film on DVD is based on estimates of demand, availability of extras such as commentary and additional material, and marketing opportunities such as anniversaries, awards, and generational windows (Disney briefly re-releases its classics every 10 years or so as a new wave of kids come of age). It's a high bar, which is why only a fraction of movies ever made are available on DVD.

Just compare the new on-line and the old off-line businesses: The average Blockbuster carries fewer than 3,000 DVDs. Yet a fifth of Netflix rentals are outside its top 3,000 titles. Rhapsody streams more songs each month beyond its top 10,000 than it does its top 10,000. In each case, the market that lies outside the reach of the physical retailer is big and getting bigger. Or take books: The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon's book sales come from outside its top 130,000 titles. Consider the implication: If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are. Google, for instance, makes most of its money off small advertisers, and eBay mostly serves niche and one-off products. By introducing new business models that overcome the limitations of geography and scale, Netflix, Rhapsody, Amazon, Google and eBay have discovered new markets and expanded existing ones. They were among the first to realize that the biggest money is in the smallest sales.

Great strategies are often counter-intuitive, based on developments outside the company’s current field of knowledge or where discontinuities in technology, demographics or lifestyles are reshaping industry boundaries. These “white spaces” represent new areas of growth that fall between the cracks because they don’t naturally match the skills and capabilities of existing business units. The companies that built the best sailing ships didn’t learn to build steamships. The people who manufactured horse buggies didn’t go on to build automobiles. Companies miss the future not because they’re stupid but because they’re blind.

In a dynamic world, conventional wisdom is an oxymoron. Long years of experience in an industry can be a detriment rather than an asset - think of the reasons given for the removal of Fritz Henderson at General Motors earlier this week. Since business models are only useful for a limited time, managers need to constantly revise the ideas and ruling metaphors that guide their perceptions. Smart companies change before they have to. Lucky companies scramble and adjust when push comes to shove. The rest disappear. The best way to see the road ahead is to start moving forward because clarity emerges more readily from error than from confusion. Great strategies move companies in new directions and are quickly refined through rapid experimentation and adjustment. In a business environment where progress depends on serendipity and spontaneity, high risk and high rewards go hand-in-hand.

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