The New Rules for How Business Works
by Rod Collins
On January 1, 2000, the Encyclopedia Britannica reached a rare business milestone. The dawn of the new millennium meant that the encyclopedia—originally published in Edinburgh in 1768—had survived across four different centuries, building its reputation through a successful business model that used a peer review process to produce articles authored by a select group of expert contributors.
Over the course of the next 200 years, Britannica leveraged this model to firmly establish its unquestioned reputation as the standard for scholarship and literary style in the realm of general knowledge. On that momentous millennial day, few could envision that an obscure application known as the “wiki”—developed in 1994 by the software engineer Ward Cunningham—would radically transform the world of encyclopedias.
A Bold Idea
In early March 2000, a little more than two months into the new millennium, Jimmy Wales, an Internet entrepreneur, started Nupedia, an online encyclopedia that would use volunteers to produce its content. Initially, Wales had envisioned that the online venture would employ the seven-step peer review process that had been the industry staple for centuries. With this in mind, he hired Larry Sanger as his editor-in-chief to oversee the review process and assembled a talented group of editorial experts to conduct the peer reviews.
However, after the first year, Nupedia’s peer review process had produced only a handful of articles. At this glacial rate, Wales and Sanger were both concerned that it might be decades before their online encyclopedia could become a viable alternative, and this concern might have materialized except for a serendipitous lunch meeting on January 2, 2001 between Sanger and his good friend, Ben Kovitz.
As Sanger was relating Nupedia’s woes, Kovitz encouraged his friend to consider using the wiki as the encyclopedia’s platform. This innovative software application made it possible for programmers to pool their collective knowledge and create common staples for the collegial software community. The wiki enabled a transparent dialogue that facilitated a cohesive conversation among software engineers by having the ability to record and retain every edit throughout the iterative development of software concepts.
Given its ease and transparency, Kovitz suggested that the wiki just might be the solution for Nupedia’s productivity problem. This radical departure from the longstanding established ways for building an encyclopedia was suddenly possible because of the new technologies and, more importantly, the new rules of the rapidly emerging digital age. Thanks to the wiki, it was now possible to leverage the collective intelligence of the many rather than the expert knowledge of an elite few.
However, not everyone likes new rules, especially those who are invested in the old rules. While Sanger and Wales were both enthusiastic about the possibilities the wiki held for jumpstarting Nupedia, the editorial experts were vigorously opposed to a digital collaboration with the crowd and successfully blocked the integration of the wiki into Nupedia. The editors protested that they were professionals and that a mass collaboration effort could never meet their high quality standards. In response, Wales pivoted and launched a second project, which Sanger dubbed Wikipedia.
In the end, the new rules prevailed. Wikipedia quickly became the world’s most popular reference guide, and Nupedia closed its operations in September 2003. By using the wiki as the new foundation for their business model, Sanger and Wales, without any intention to do so, completely disrupted a well-established business model when a little more than a decade later, the Encyclopedia Britannica announced the reference book was going out of print.
An Unusual Threat
The Wikipedia story is not an isolated incident. Business leaders in other industries, playing by the old rules, have been suddenly disrupted by innovative upstarts proficient in the new rules. Border’s fell victim to Amazon, and Blockbuster to Netflix. Kodak rapidly faded in the wake of Apple’s iPhone, LinkedIn has revamped the recruiting industry, and Craigslist—also without intention—became the newspaper industry’s fiercest competitor by draining its classified advertising revenue stream.
This scenario of innovators employing new rules to displace traditionalists invested in old rules will continue to be a major theme in business evolution for the foreseeable future because, whether we like it or not, the digital revolution has truly rewritten the rules for how the world works. And, what may be even more disconcerting for those who would like to hold onto the old rules, the digital revolution is just getting started.
The convergence of the Internet of Things, blockchain technology, and artificial intelligence over the next decade will dramatically accelerate the digitization of all industries. Those who adapt to the new rules will survive and those who don’t are likely to be disrupted and displaced. That’s why the single greatest threat to the survival of many companies today is likely to come from an unusual place: their own managers.
Evolving the Company
One of the consequences of the new rules is that business management needs an overhaul. A nineteenth-century management model—regardless of its historical success—is unsustainable in a twenty-first century world. A traditional management model designed for preserving and maintaining the status quo is ill-suited for a world that has been transformed by the unprecedented combination of accelerating change, escalating complexity, and ubiquitous connectivity.
This means organizations need to approach strategy very differently. In a fast changing world, strategy is less about planned extrapolations of current business and product models, and more about discovering new ways to delight customers with game-changing innovative products. This explains why what was once known as a “sustainable competitive advantage” has now morphed into an almost certain pathway to oblivion. For decades, Kodak had successfully employed its expertise in the old rules to cultivate its advantage in film photography, but that ended rather abruptly when Apple leveraged the new rules of the digital age to transform photography and render film obsolete.
If there is a sustainable competitive advantage in business today, it’s not about preserving current business and product models via cost efficiencies and operational excellence. Instead, it’s about having the capacity to evolve your company through rapid cycles of business and product models. There was probably nobody more cost efficient or operationally excellent in the processing of film than Kodak. But when film no longer matters, what good is cost efficiency or operational excellence. To paraphrase the late Peter Drucker: There is nothing more useless than doing the wrong thing right.
Kodak didn’t fall by the wayside because they had bad managers. In all likelihood, they had very good managers who were diligently following the tried and true norms of management as successfully practiced for decades. They were accomplished practitioners of the old rules and, with good intentions, doing what they thought was best for growing their business. But despite their good intentions, it appears that they couldn’t see, much less adapt, to their rapidly changing market.
Interestingly, Kodak’s inability to evolve the company was not a failure in engineering innovation—after all, it was Kodak’s own engineers who invented the digital camera—but rather the result of the limitations of a management mindset that was incapable of recognizing the extensive possibilities of digital technologies.
Two Fundamental Changes
Why didn’t Kodak invent the smart phone? Surely if the engineers in a computer company could integrate a camera, a phone, and an internet portal into one device, the Kodak engineers were similarly capable. And why didn’t the Encyclopedia Britannica create Wikipedia? Although the popular online encyclopedia set itself up as a not-profit venture, the mass collaboration model could have easily been designed as a for-profit enterprise.
In other words, why when innovative leaders are achieving extraordinary performance leveraging new technologies, do so many managers remain riveted on next quarter’s performance, act as if their current operating model will last forever, and have great difficulty in envisioning a world that will be very different from today?
If traditional leaders expect to compete successfully with the disruptive new breed of innovative leaders, they will need to learn the new rules for how business works. To do this, senior leadership teams will need to make two fundamental changes.
First, instead of doing strategic planning, they need to learn how to do strategic discovery. This means ignoring the time-honored three-to-five year time horizon and looking ten years down the road. That’s because it’s hard to assume you will be doing the same thing ten years from now and forces you to envision a future that looks very different from today. When this happens, innovation begins to be baked into the DNA of the organization.
Second, leadership teams need to be transformed into the strongest teams in their organizations. Unfortunately, in far too many companies the senior leadership team is often the weakest team because it tends to be a disjointed group of silo chiefs fiercely competing against each other for internal power and resources. In a stable world, companies can survive despite these dysfunctionalities; however, in a rapidly changing world, this dynamic can be fatal for the simple reason that change is happening so fast today, no single person can process what’s happening in real time.
Processing change and strategic discovery are only possible if the senior leadership team grows as a holistic and highly interdependent team. If they can’t make these two changes, they will likely remain the single greatest threat to the survival of their companies.
This article was originally published in Management-Issues.com