Coming up with a strategy is easy; coming up with the right strategy is hard!

The Thinker

Coming up with a strategy is easy; coming up with the right strategy is hard!

I was reminded of this recently by a couple of events.

The first of these was a post by Tim Kastelle, where he outlined the advantages of a small company over a larger one.  In that post, Tim points out that large companies can become victims of their own success.  They achieve growth through a successful strategy, which reinforces the value of that approach, making it increasingly difficult to change.  Size also brings with it the need for systematic planning and execution processes which increase that difficultly due to set planning and review cycles.

In contrast, with little to lose, small companies can change direction almost at the drop of a hat.  Without ossified corporate planning processes, they can be nimble, skirting around large incumbents by changing directions as new information and understanding emerge from markets and the product development team.

Of course, this can be a double edged sword.  I have worked in companies that have changed their plans so often and so quickly that staff have never had a chance to add value through execution.  Chopping and changing direction may be all very well when those changes are worked through at the board, or founder level, but at some point everyone else needs to understand where the company is going and how they can help it to get there.  While it’s all very well to expect people to be as flexible as entrepreneurial founders, that’s often a lot to ask.  Flexibility without communicated understanding simply leads to chaos.

The second thing that made me think about the challenges of developing a viable strategy was a guest lecture I did at the University of Queensland.  That lecture was aimed at conveying the challenges of strategy under conditions of uncertainty.  Uncertainty can come from a staggering number of areas, with product/technology and market uncertainty being the usual suspects.  The reason for this is that competitive advantage is usually derived from either a novel product or service, or from a novel business model.

The importance of the former was highlighted in a presentation by the Australian Institute of Company Directors where a novel lighting technology was described that allowed an established firm to take a dominant position in retail lighting products.  There wasn’t any business model innovation involved here, just a really good idea brought to market through existing sales channels.  The strategy was relatively easy to come up with in this case.

Reading Henry Cheesborough’s book on Open Innovation recently reinforced the importance of the latter.  He describes some excellent examples – including some from Xerox PARC – that demonstrate that a novel product without a viable business model (i.e. strategy) can be an interesting waste of time.  A great idea without a business model to extract value from it remains just an idea.

Another idea contained in reading material for the lecture I did identified the concept of competing on the ‘edge of chaos’.  I am sure that working at many of the current darlings of the new wave of digital innovation, like Uber or Airbnb, probably feels like working on the edge of chaos at time.  Their strategy will be evolving as their product meets their customers, and market requirements impinge on how their business model operates.  Uber in particular is striking unexpected regulatory and legal hurdles in a number of markets. The very public face of this process seems to be a lot of sabre rattling, with Uber voicing an unwavering faith in the validity of its business model and regulators voicing an unwavering faith in their, well, regulations. In the background though, Uber will be refining their strategy on a regular basis, based on emerging information from the marketplace.

This type of dynamic strategy is difficult to pull off, which is one of the reasons that many otherwise well-resourced start-ups with good ideas fail.  The commitment to an innovation can lead to strategic inflexibility early in a company’s lifecycle, as well as later in it.  One advantage that businesses based on digital products have though is that they can iterate, or pivot, relatively quickly.  However, businesses that are involved in the development of manufactured products have less flexibility.

Take, for example, a developer of a clean energy technology I worked for at one stage.  They were in the process of developing a product using a small number of multi-skilled people.  They potential of the innovation brought investment, which allowed them to hire more specialised people, which in turn allowed the product to make significant leaps forward.  However, the investment meant earning a return, and the company had to invest in manufacturing capability to get the product to market.  So they had to draw a line in the sand and commit their limited resources to building a highly specialised and expensive manufacturing line, thereby largely locking their design into a particular form – and excluding some other, promising possibilities.  Their market was understood relatively well, and although it was pretty dynamic they knew where it was likely to go.  As a result, they could match their strategy to the market need with some precision.  However, regular the ability to pivot regularly wasn’t really available to them.

Take another example of a company I’ve worked with recently which is working on advanced, next generation medical equipment.  This company has what it believes to be a disruptive innovation.  That is, an innovation that is lighter, cheaper and better performing in a market where the dominant incumbents are competing on old technology.  However, this company also has a competitive, current generation technology in an advanced stage of commercialisation.  The strategic challenge for them is whether to dedicate their resources to making money out of the current product, or divert their attention to the next generation product.

Classic disruptive innovation theory would suggest that they back themselves with the next generation technology.  But open innovation suggests that the incumbents might actually have the next generation technology too, but have chosen to continue ringing profits from their current generation technology before they disrupt themselves.  In this context, the small company can either make some (relatively!) certain returns now, or make nothing and bet the farm on their ability to capitalise on their next generation tech.  It sounds like a relatively simple choice, but when you’re living on borrowed time – or money! – then it can be hard to see through the fog of uncertainty to decide on a path.  And with this type of technology, pivoting is an expensive and time consuming action that can open the door to competitors as you regroup around a new direction.

There is no simple answer to this though; there are no strategic silver bullets.  Good solid planning and rational thought processes are a start.  Deriving an understandable strategy that can be communicated and executed is another.  So is retaining the flexibility (and the humility!) to junk prior investments in an old strategy in favour of a new one.

Perhaps even more importantly thought is to not be so blinded by the brilliance of an idea that you start to think that the product is the strategy.  Choosing the right strategy might be hard, but it remains a core part of any successful business, even in the current age of rapidly accelerated innovation.

Who’s in control here; us, or technology?

Man vs tech 2  Technology helps to drive social and technical change, and like most change there are winners and losers in a reshaping of the social landscape.  It’s hard to blame the technology though – it’s simply a tool put to use by people.  But technology often gets a bad rap, for reasons that are mostly social in nature.

Take for example some of the recent articles appearing in the press reflecting anxiety about the replacement of jobs by technology.  Some of this is being driven by the disruptive effects of innovations such as Uber, Lyft and Airbnb which are disaggregating supply chains in the taxi and accommodation sectors, threatening to eliminate service jobs in the process.  It’s hard not to see how this can lead to anxiety and even fear about the impacts of technology on people’s personal lives.

The increasing power and prevalence of mobile technologies is one of the reasons for this extension of technology into previously untouched areas.  For example, the US job site CareerCast recently published a report on the top 10 endangered jobs, and it includes occupations as diverse as farmers, news readers, lumberjacks (!) and tax collectors.

The destruction of some jobs by technological innovations isn’t new though.  The rise of mechanisation during the industrial revolution resulted in a shift from largely agrarian economies to industrial ones.  This has had significant impacts on employment, even though the 20th century.  For example in 1900, 41% of Americans worked in agriculture, but the substitution of machinery for man power reduced that to 2% by the year 2000.  This trend wasn’t confined to agriculture though, with innovation also significantly impacting on the number and type of jobs available in the manufacturing sector.  Just ask workers in the automotive industry.

These industrial employment trends are relatively easy to spot.  However, more recently the idea has been extended into sectors that have been unconcerned with the substitution of technology for labour.  Take, for example, the thesis of Erik Brynjolfsson and Andrew McAfee in their excellent book, The Second Machine Age.    In this text, Brynjolfsson and McAfee outline how rapid increases in the availability of cheap computing power combined with the digitisation of information are moving technology to a space where it can perform tasks that have traditionally been considered as being beyond the reach of computers, such as health care and professional services.  They also suggest that rapid technological change has been destroying jobs faster than it is creating them, contributing to the stagnation of median income and the growth of inequality in the United States.  Fertile grounds for concerns about the development and control of technological innovation.

These anxieties have led to the prospects of ‘new luddites’ appearing on the landscape (for a good discussion of the issue, see here).  The idea of luddism has come to be associated with people who display an ignorant and naïve opposition to technology.  However, the original luddites were concerned with the impact of technology of the fabric of society in the 1700s, and arguably these concerns are even more relevant in today’s environment of accelerating innovation and change.

The concerns about the march of technological innovation point to another issue; that is, whether technology defines society or society defines technology.  This idea is captured in the concept of technological determinism, which suggests that the type of technology developed by society is the primary driver of how that society is organised.  The idea was first proposed by Karl Marx, who observed that “the handmill gives you society with the feudal lord: the steam-mill, society with the industrial capitalist” (The Poverty of Philosophy, 1847).  What sort of society are we likely to get when digital is the dominant form of technology?

The legitimacy – or strength – of technological determinism is hotly debated though, and there isn’t really a definitive position on the matter.  But the idea highlights the important role that technology has in shaping society.  And it also identifies one of the concerns feeding into anxiety about the impact of technological change; that people aren’t really in control of where technology is going.

Take the more recent example of Apple and its sequence of iPhones.  This technology was developed by a relatively small team of people, yet its impact has been to redefine social practices and relationships across much of the world.  The conduct of social relationships through these mobile devices has changed everything from who constitutes a friend, to how we find a partner in life.  The pervasiveness of the technology is reflected in some studies that indicate that the average smart phone users unlock their phones, on average, over 100 times a day.  For those of us the existed before the rise of this technology, that’s a significant change in behaviour!

The idea that a small group of people can develop and control such important technologies is an equally fearful prospect for many people.  However, we’ve been living with this situation for centuries.  In the case of electric power systems, a relatively small group of people plan, develop and control this critical infrastructure. This is partly because the cost, complexity and essentiality of the system would make it hard to run any other way.  While innovation in renewable and storage technologies is starting to change this, we have happily supported an elite technocracy in its control of the system as it has yielded significant benefits to the individual and society over time.

A concern arising from this is that technology may eventually exceed human’s capacity to control it.  Certainly the trends identified by Brynjolfsson and McAfee suggest it is a possibility, and the potential for intelligent machines that start to design and build themselves is a popular basis for many a Hollywood movie.  However, technology is not autonomous – at least not yet.  It doesn’t define and develop itself and it remains in control of people; technology is defined by people, not by technology.

Returning to the example of smartphones, the original iteration of the technology was relatively simple in its application – at least compared to today’s version.  Since that original innovation, people have found a multitude of applications for these high powered, handheld computers, ranging from ordering a pizza, to building personal relationships to monitoring arrhythmic heartbeats.  All of these applications have been developed by people, in order to meet a need.  Collectively they have created an impressive ‘piece’ of technology but in the end people remain in control.  This idea is often lost in the hypnotic impact of each new iteration of the technology, but it remains the case.

This fact is also often lost on the entrepreneur.  Much of the wailing about the impact of regulations on innovations such as Uber and Lyft derives from a belief in the logical progression of technological evolution.  These entrepreneurs would prefer it if prior social structures as represented by regulations – which at least partially contribute to defining technology, including which technologies are acceptable – simply stepped aside while their (commercial) innovations were allowed unfettered access to markets.  However, these regulatory structures have been developed over time to reflect public concerns and standards.  They are both useful and important, although they can become ossified and inflexible over time.

As an example of this, imagine if we didn’t have these socially negotiated, centralised regulations.  Would we have a world filled with nuclear power, genetic engineering and a range of now forgotten innovations that seemed like a good idea at the time?  That’s not an argument for keeping regulation stagnant, but an observation that regulations are to important and useful to be subject to commercially motivated, short term change.

However, regulations are negotiated and negotiable and this is what seems to be forgotten by many in the entrepreneurial community.  Technology often helps regulations and other social structures evolve; and conversely technologies often need to be shaped to existing social structures if they are to be successful in the marketplace.  Henry Henry Chesbrough’s identified this in his book, Open Innovation.  In there, he highlights the need for a useful business model for making use of technology.  He also highlights the relatively narrow window that most innovations have to take advantage of their new ideas, and before anyone else does.  In these circumstances, working to understand social barriers to adoption (including unsympathetic regulations) is a critical part of the innovation process.

So, technological innovation is inextricably tied to society, and the success of one leads to the success of the other.  In most cases, the development of powerful technological innovations is undertaken by a relatively small group of people and the success of their innovations can lend significant power to those people.  But in all cases, the users determine the success of the technology.  This includes how the technology is used in practice, but also the standards, norms and (yes, Uber et al) regulations that define what is and what is not acceptable in society.

So while those people whose livelihood is threatened by technological innovation have a right to be worried about what the future holds images of a dystopian future where technology rules people are some way off.  Instead, we all participate in the development of technologies through our behaviour and use of those technologies.  This is an important idea for both the developers and users of technological innovations should keep in mind when thinking about how technology drives the future.

Careful what you wish for – Big Bang Disruption in the electricity industry

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Disruptive innovation is often seen as a vehicle to upend not just existing technologies, or incumbent companies, but entire systems.  But is this what we really want?

One of the many extensions of the idea of disruptive innovation to hit the market (and there is a market for these ideas, make no mistake!) is Big Bang Disruption. The idea of big bang disruption is similar to Clayton Christensen’s original ideal of disruptive innovation, except this type of disruption happens much faster, in some cases verging on instantaneously – or so claim the originators of the idea (for a review of their book, see here).  This concept has been applied to the electricity industry in a recent blog over at greentechmedia, suggesting that technology will shortly enable the destruction of traditional electricity systems.

Widely viewed as innovation challenged and the source of much of the carbon dioxide that drives climate change, there are endless calls for this industry to be disrupted: for existing technologies to be overthrown, opening the way for the democratization of electricity supply through the use of distributed energy generation and storage.  The achievement of this goal would see consumers generating their own electricity, free of the burden of high cost distribution networks and the tyranny of centrally controlled energy markets (with the added benefit of significant profits for the technology providers!).

But is this something we really want?  Take, in the first instance, transmission and distribution networks.  These are highly regulated (generally) public assets because they are natural monopolies.  They have been built up over long periods of time, with taxpayer funds and – despite the clamor for their overthrow – offer a public good.  Why would you choose to junk these assets when they can serve the important purpose of offering backup supply, or the opportunity to sell that locally generated energy to other consumers?  After all, isn’t the sale of excess energy via the grid the business case that has driven the adoption of domestic solar in the past 10 or so years?  Without the grid, subsidized electricity prices for solar energy wouldn’t be particularly useful and the adoption of the technology would be significantly lower that it has been.

Taking another perspective, imagine you are having a conversation with someone from a country about which you know nothing.  In that conversation they say that they have a high value and robust system for getting an essential service to everyone in the country, but they now want to junk that in favour of yet to be proven technologies because they’ve decided that they don’t like the cost of maintaining the existing asset.  That might make sense, but rather than abandoning that asset you’d have to ask whether a new role could be found for the infrastructure, rather than being torn down to be replaced by another set of expensive infrastructure.

Aside from this, electricity grids will continue to serve a public good for some time yet.  Not everyone can afford the capital cost of new distributed generation and storage technologies.  And even if you could, would you be willing to live without power in the event that a product fails?  How quickly is your system likely to get repaired?  How would you feel about paying for service level assurance for your shiny new system to get it’s reliability to a level comparable with modern grids (minutes of outage per year)?  Overthrowing robust, established systems always comes with down sides.

This leads me to the point I really want to make, which is it’s important to consider what is being disrupted when talking about disruptive innovation. I think that there is a real need to see technological change – and perhaps even disruptive change – in our modes of power generation.  But that doesn’t mean that the entire electricity system needs to be overthrown.  Distribution grids can serve an important role in providing backup, high quality supply, support for those not able to ‘upgrade’ and a mechanism for energy trading at a local level.

And this is a legitimate use of the idea of disruption.  While Clayton Christensen focused on (in one case) disruption in the hard disc drive industry, computers continued to exist while drive architecture went through repeated periods of turmoil. The analogy with the power industry is that you can replace one set of technologies (generation) without displacing the system in its entirety.  So it’s important to think about what is being disrupted, rather than claiming that everything is being disrupted.

In the case of electricity systems, it’s going to be more productive to talk about technological disruption rather than system disruption, which is where many discussions of disruptive innovation in the electricity sector seem to land.  We should define the problem that innovation is being used to address before invoking the magical properties of disruptive innovation to argue for what is often an ideological or profit motivated argument to overthrow an established system.  

However, we could seek big bang disruption of the electricity industry.  But be careful what you wish for, because it won’t be cheap and it won’t be painless.  Instead we should be looking for ways to leverage innovation to achieve change, without destroying systems that can continue to add value in a world of democratized energy supply.