In the past, the fundamental lifecycle of a company has remained broadly the same. Underlined by models like Steve Blank’s customer development process, young companies are responsible for taking risks and discovering customer needs. This means they go through a fast process of testing and learning, establishing whether anyone needs the solution they’re providing, and succeeding or dying based on the result. As a consequence, the most common reason start up founders give for the failure of their companies is that they were producing a solution for a problem that didn’t exist. This phase of a company lifecycle is often called ‘customer discovery/validation,’ and it always happens in the early stages.
Once a consumer need has been discovered, it is then up to the company to scale up and deliver the solution in as efficient a way as possible. This phase - which is often called the “company building” phase - involves hiring the right people, outsourcing when required and working out efficiency gains to optimise the core value proposition. Experimentation can still be a big part of this phase, but typically the efficiency gains will be incremental, and will rely heavily on growing the customer base through activities like marketing. Most companies, and all the large ones that you care to think of, are brilliant at optimising their operations towards this goal. Why do large companies tend to be more risk averse than smaller ones? Because rather than making dramatic pivots, the goal is to make constant tiny adjustments to bring operating costs down whilst keeping customer satisfaction the same.
This model has held for the past hundred or so years, because even when new technology is introduced that allows for a dramatic efficiency gain the time taken to introduce it to the market is usually measured in months and years, giving incumbents the opportunity to adopt or die out.
The Technology Enabled Model
As a result of technology trends, in today’s world once a company gets to a certain size or maturity the model of linear efficiency gain ceases to explain what is actually happening. Instead of the incremental efficiency gains seen over time, the reality is something that looks like this:
Radical drops in cost and increases in need satisfaction can be achieved by companies that use the right technology, and this change can come into effect overnight. It is for this reason that a company like WhatsApp could have 55 employees and a multi billon dollar valuation - in the recent past something like this would simply not be possible.
The reason why these accelerated jumps in customer satisfaction and reduction in cost are possible today are because of four key trends:
Speed of software delivery
Smartphone proliferation and increased connectivity has meant that a company’s customers can have access to improved technology overnight. One of the best examples is Tesla, constantly shipping updates to cars that contain not just efficiency tweaks, but features like autonomous driving. These features fundamentally change the workings of the product — either in a positive way like autonomous driving, or averting a negative like a security update. In the past competitors had time to adjust to these jumps in customer satisfaction, but in the new company operating model you have minutes to respond.
Low barriers to entry
As a result of low technology costs companies can experiment at much lower cost than before. Research and development labs used to be restricted to only the largest firms, but today a company of twenty can build physical devices, push software updates and try new things. New discoveries that dramatically reduce cost can be found and released to the public in moments — open source libraries that replicate the functionality of already established products (or currencies, as in the case of Bitcoin).
Low switch friction
Consumers used to be disincentivised in using radically new products because of the high switch friction of a piece of hardware, or high replication costs. Today, the switch cost to a consumer is searching for an app and adding it to their phone. A culture of experimentation and trying new pieces of software only continue to rise, making it difficult for incumbent companies without significant competitive advantages to defend themselves.
Lack of regulatory understanding
The speed of technology’s entrance to market is often aided by a lack of regulatory understanding. In the past, regulators had a firm grasp of technology that entered a specific market. Technology today is by its nature cross industry, and it takes time for regulators within industry to recognise what the impact of a new technology might be. In the past, radically new technologies were sheltered from the market because of the time that it took to approve them (healthcare being the best example of this). Today, there is a large grey area that technology exploits, hitting the market instantly and forcing regulators to enforce the past rather than the present.
Taking advantage of this new model
This new operating model presents significant challenges for big business. The question that will differentiate those that flourish and those that fail will be who recognises not only what’s possible with new technology, but also what’s right for their business and customer base.
For most companies, the key problem is that to get this synthesis of what’s possible and what’s right, you need to involve completely disparate groups of people. Those who understand what’s possible will typically be the developers, engineers and technologists. Those who understand what’s right for the business will often be those in client development and senior management.
Companies like Tesla, Facebook and Google who are able to relentlessly evolve their offering and radically reduce cost and increase satisfaction are only able to do this precisely because the people that know about the technology (the engineers) also know about what’s right for their business and customers, often because they are founded by or run by engineers.
For non-tech companies, bridging this gap is essential to enable anyone in an organisation to develop company sustaining innovations that will allow a company to not only survive but thrive in the new world.