As mentioned in my previous post, the industrial-era approach of developing a product or service the market values and then optimizing profitability for a maximized period is unlikely to work well in the Digital Age, where uncertainty and volatility are on the increase.
We need a new model — one that is designed for an unknowable future. I have developed an approach that turns unknowability into a strategic advantage. It comprises five elements:
If we look at all human operating models across all time, we will discover that the tribe is the optimum model for thriving in harsh and uncertain environments. Tribes need to be highly adaptable and recognize that inattention to their environment could mean death. A hierarchical, middle-management-heavy leadership model is not optimized for the Digital Age.
Having one business model is the equivalent of having only one egg in one basket. Your business model might run for another 60 years or get taken out next week by a change in consumer sentiment. The problem is, you cannot foretell the life expectancy of your organization. To address this risk, you need to adopt a polymodal approach. In other words, you need to create a portfolio of business models. Think of these as experiments or bets on the future.
In many sectors, the players are in a race to the bottom in terms of efficiency through automation. Unfortunately, you cannot automate innovation. And it is innovation that will deliver the differentiated customer experiences that will command a high margin or high market share, or both. Innovation comes from the cognitive capacity of your talent and not from an algorithm. However, you can industrialize the process of innovation and even use your innovation engine as a market-sensing strategic compass.
A focus on profits is like failing the famous marshmallow test. A focus on profit is an inability to defer gratification. I believe that organizations need to focus less on profit and more on growing assets, particularly in respect to human and data capital. Physical assets are an obstruction to adaptability, so these should be reduced. A strong portfolio of assets will generate the profitability that is required, but it will also provide a strong buffer against a tempestuous and unknowable future.
Great people are the source of great innovation. Very few organizations see their people in this light, preferring to use them as “cog” workers, mindlessly following the factory process manuals. Smart organizations will see their talent as cognitive workers who turn their brainpower into market-pleasing value. The most talented people will gravitate toward those leaders who are not trapped in an industrial-era mindset.
You will hopefully recognize the importance of your people with respect to your organization’s ability to thrive in the post-industrial era. I would suggest that we are entering a post-loyalty world where even though the customer remains king, their “digitally enhanced” fickleness means that there is a danger of overinvesting in individual customers and underinvesting in our talent pool. This runs counter to prevailing wisdom.
This changing reality will be a problem for analysts and investors, as well as business schools, who use profitability as the key metric and who like the clarity of a harmonized set of offerings, a defined “go to market” plan and a simple financial model. These influencers drive the behavior of leaders, so the tendency is for leaders to stick with their industrial-era models. This will be stressful, given that forecasting is an increasingly fictitious exercise. It will put enormous pressure on employees who are tasked with reconciling the disparity between the forecasts and market reality. Each quarter will become more challenging. Games can be played, such as faking profitability through cost efficiencies, rather than top-line growth. But that is not sustainable.
Keep in mind that nobody wants to follow a deluded leader. Smart leaders will naturally try to meet the needs of the analysts and investors, because that is how they are judged. But they will also expand their activities in line with my guidance to both dampen the disparity between expectations and reality. Eventually the investors and analysts will wake up to the inadequacies of the current reporting model. In this respect, they too are not immune from transformation. So it would be wise for them to anticipate this seismic change.