Innovation: The only competitive advantage

Reading this brilliant article about Snap’s pre-IPO documents, one thing is particularly striking. When asked to describe Snap’s future strategy, the company states that:

In a world where anyone can distribute products instantly and provide them for free, the best way to compete is by innovating to create the most engaging products. That’s because it’s difficult to use distribution or cost as a competitive advantage—new software is available to users immediately, and for free. We believe this means that our industry favors companies that innovate, because people will use their products.

Whereas in the past businesses could build up competitive advantages through specific know how or protected IP, today technology is breaking down these barriers and forcing companies to constantly evolve their offerings.

The only way to have a true competitive advantage, then, is to innovate more quickly and more successfully than other entrants to the market. To turn innovation from a fluffy strategy into action, companies need to adopt an experimental and tech focussed culture and mindset. In essence, this is what Snap’s strategy is hinting at: much like how the value of an ad agency rests in the ingenuity and creativity of its people, Snap’s value is not in its products (they can be easily copied), it’s in their people’s ability to respond to and flourish in a changing world.

Looking at companies that truly embrace this “innovation as competitive advantage” approach, you start to see that the only sacred strategy is: keep experimenting. When AirBnb started it seemed like a core tenant of their strategy was not to actually own any hotel rooms. Recently, though, they’ve started buying houses. Amazon started because of the limitations of book stores but recently they’ve started opening book stores.

The ability to change a strategy to accommodate changing technologies and opportunity is the foundation of an innovation strategy that will actually achieve results. Why so few companies do it is because persuading stake holders that these aren’t U turns but small scale experiments can be very difficult. The whole point of a strategy is that it takes into account changing environmental factors: but when the world is moving so quickly it’s impossible to account for everything. As Snap describes, the best way to deal with this is to have an innovative mindset at your core (though this is easier said than done).


Too much content, not enough curation

Why online education is failing

Every school or university has a library. Some universities have dozens of libraries. Everyone recognises, though, that simply having access to information stored in a library is not enough to give someone a good education. Teachers in schools and universities guide, curate and inspire students to find the right information and to present it back in a coherent fashion. Teaching a way of thinking, rather than just studying facts, gives students the ability to learn for themselves and become adaptable and critical of new knowledge and ideas. With no guidance, the only way of studying books becomes to start at “A” and work your way through to “Z”.

A university with no teachers

Technology gives anyone with an internet connection free access to information. The Web contains more content than any library, and more information than any single human being could ever know. Yet like a university with no teachers, there is no one to guide or curate this content. For people who want an education, there is a core component of knowledge missing from the web: how to learn. For those who know how to find relevant information online and utilise it, the web can play an important role in educating and improving their intellectual capital. But there is a key precondition: knowing where to look.

Open source teaching

To counteract this problem many universities are now opening up their courses to outside observers. What used to be restricted to a privileged few is now available for the masses. Want to learn about photography? Take a free course from Harvard. Need to brush up on Philosophy? Go to Edinburgh University’s website. Although these courses are free, they ironically ignore what is best about the web: that a lot of the content and information is out there already. Rather than recreating much of the content that has been developed already, a teacher might just select the best resources relevant for the student. Teaching a way of thinking is not teaching the facts.

A new model

What does a teacher fundamentally do? They help you achieve goals; developing your way of thinking and challenging you. Content alone can’t do this, yet technology might be able to. Developing responsive and personalised challenges and tasks could help a student to reach their goals in a scaled and open way. Importantly, the learning is goal focussed, allowing someone to apply their knowledge to a new job or opportunity. Though someone may not know what they need to learn, they will certainly know where they want to get to in life. In this way curation on the web could help them get there; turning the content on the web to good use and democratising the knowledge for people who don't know where to start.


A New Company Lifecycle

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.


The modes of production have been democratised: so where's the revolution?

Today, technology is smashing down barriers to entry. Want to start a magazine? An insurance marketplace? A travel agency? In decades past you'd have to have a lot of investment up front in order to make your dream come true. One of the core tenants of capitalism - that an investment in capital brings return - meant that class systems were ingrained and the owners of capital were pretty much untouchable.

With technology, the 'untouchables' of business are being severely disrupted. Owning the modes of production today helps, but it isn't enough. Those with an entrepreneurial spirit can spin up an app and take away your business overnight. In the past decade this has happened to countless unfortunate industries; some centuries old. This disruption is powered by a profoundly open and democratic force: the web. Unlike modes of production before it, the web is at its core open (anyone can view the source for any page), and accessible (anyone can write code, put up a website and have access to a market of billions.) Hardware used to be the biggest barrier to entry for technology, but computing hardware is now so cheap that soon every global citizen will have access.

This would lead you to predict, surely, that forces like technology and the web would allow capitalism to become much more meritocratic, and for Marx's demands to look a little, well, 1800s.

The new mode of production: The Mind

In fact, the state of the world in 2016 is exactly the opposite. Technology has helped create the most unequal global economy in history. In the UK the top 1% own 25% of the UK's wealth. Globally, the picture is even bleaker. And yet the same thought keeps coming back: if anyone can start a company and disrupt the status quo, what is going wrong? Why is tech one of the least diverse industries?

The answer, I think, lies in the skills required to participate in the disruption of technology. Whilst some are taught to code at a young age, other's don't have enough access to technology or mentorship. How can you disrupt industries if you don't have the skills to be able to do so? There is the illusion of a meritocracy but in reality something very different. Initiatives like Code Club and Coding in schools are good but they're not enough.

Everyone needs to believe that they can disrupt and change the world, and be given the tools in order to follow through. Technology is not enough. Without the training and education required to allow everyone to participate we'll create a world more unequal than even Marx could have imagined.