Excerpt from Chapter 1 of the book, The Elastic Enterprise, Kindle version now available on Amazon.com
Chapter One: Innovation or Transformation?
The Strange Case of Companies that Grow in Recession
From 2007 and the onset of recession a small group of companies began enjoying exceptional sales and profit growth, companies like Apple and Amazon.com to name the most obvious. They didn’t just grow. They didn’t just enjoy their most successful years. The best of them began performing like no other company before.
At the same time, another group of companies headed for the bottom.
Companies such as Nokia who prior to 2009 enjoyed a totally dominant position in the mobile phone industry, mobile e-mail pioneer RIM, telecoms infrastructure leader Cisco, electronics giant Sony, a household name with a dazzling record of product innovation, all are distinctive companies that are suddenly struggling to survive.
We believe that the answer is simple and exciting. A new type of enterprise emerged in the first decade of the 21st century and its processes and techniques are repeatable and replicable by companies with ambition.
We call this new type of company an elastic enterprise.
Elastic enterprises have generated a new generation of competitive strategy and new operating processes that together form a remarkable response to changing economic conditions.
Elastic enterprises are a new, more dynamic, and more inclusive approach to wealth creation.
What allowed companies like Apple and Amazon to succeed, while their competitors failed, is the subject of this book.
But Apple and Amazon are by no means alone. Nor is this story simply about high-tech companies.
The dimensions of the new business revolution go broad and deep and the lessons can be applied across many industries and many different types of businesses. Among the exponents that deserve a special mention are UK newspaper The Guardian, Korean giant Next Human Network, travel platform Expedia, even the formerly staid New York Times.
Nor, clearly, is this simply an American success story.
While the revolution may have begun in the U.S. and some of the most dramatic examples of wealth creation are seen in Apple and Amazon, they represent only the first chapter of the story.
We see elastic enterprises emerging in traditional industries as well as emerging economies. And we see a number of long-lived companies, like GE and Caterpillar that are adding elastic elements to their businesses.
Markers of Elasticity
The most obvious character of elastic enterprises is that, first, they’ve proved themselves to be successful in the bad times.
But secondly and significantly they are also operating on a new scale, typically with many thousands of business partners.
They are also stepping effortlessly from their core businesses into adjacent businesses, from computing hardware into service platforms and then into mobile devices and apps as Apple did with iTunes and iPhone. Or with Amazon — from books to a broad base of retail products and then into Cloud infrastructure and services.
In other industries, GE Aviation has added a sophisticated business platform to collect inflight engine data for its aircraft engine business, and then formed a global aircraft maintenance business with many global partners. Today they have mobile apps, new service models, sophisticated alliances with avionics manufacturers and cooperative arrangements with other aircraft engine manufacturers. Such progressions have propagated to other GE businesses
The same progression can be seen at companies like Deere and Caterpillar, as they expand their businesses globally.
Google too, as you would expect, exhibits similar traits.
The best of these companies are taking the most difficult strategies in business and executing with apparent ease while their peers are struggling to hold onto market share with an outdated operating model.
The reasons for their success are undoubtedly rooted in technological advance, in mobility and Cloud, as well as the vast interconnections of the Internet. But in a sense those are givens, infrastructure that every company has access to. The true leaders and pioneers are doing something else that gives them exceptional market advantages.
While their peers might be focused on innovation or agility, these companies are transformative. They are changing the way business is done. With these markers aligned, other classic processes, like M&A, innovation, strategic management, product development, marketing and customer care soon change in character.
We call the collection of strategies and operating principles that create this new level of success the elastic enterprise to distinguish it from other operating models, and to highlight the fact that elasticity is not really about innovation or agility.
If success only relied on innovation, Sony would still be a dominant force in consumer electronics. And if agility was the only necessary requirement of the modern age then Nokia, with its multiple, annual product releases would still be the dominant force in smartphones.
It is essential that we learn from the elastic enterprise’s success. Your company should aspire not just to emulate an Apple or an Amazon but more importantly to embrace a highly effective new operating model.
We want to describe the new operating model for you in this book.
To understand it we will introduce a series of new concepts. They’re simple but powerful.
The key concepts we will use are:
- Radical adjacency
- Mass differentiation
- The new scale economics
- Sapient leadership
- Active strategy
- The five dynamics of the elastic enterprise
Radical adjacency. Adjacency moves are notoriously difficult for companies to make. Elastic enterprises are showing it is possible to make radical adjacency moves, moves into geographical markets or new product areas that do not reflect a company’s core competency. In fact radical adjacency redefines core competency (more of which later). It means stepping outside the core and operating in new markets with assurance and ease. Elastic enterprise leaders typically implement radical adjacency strategies.
Mass differentiation. Markets can no longer be segmented on traditional demographic lines. In a new global economy companies must elicit market segments from data and customer interaction. Customers are defining their own needs and their own market reference groups.
In essence the long tail is becoming the market. That means companies must be capable of offering far more diversity in their product offerings. Expedia, for example, revamped its affiliate program in order to empower affiliates to frame product offerings to their hyper-local, and hyper-niche markets. Instead of one Expedia there were suddenly dozens of new hyper-local, content rich travel offerings in the market. This is typical of an elastic enterprise, creating mass differentiation, and securing great customer loyalty through partners.
The new scale economics. Mass differentiation is part of the new economies of scale. Traditional scale economics were built by growing a company’s internal resources, through capital investment and hiring. Today scale takes place through ecosystems of freely collaborating third parties.
Sapient leadership. Because growth takes place through business ecosystems, those free floating collaborations of independent businesses and creative people, leadership can no longer be commanding and demanding.
Both Apple and Amazon have had to concede ground to their ecosystems and their businesses have benefited immeasurably from it.
We call the new leadership sapient because we want to convey a new capability. That is the ability to appear, to an independent ecosystem, as a leader operating on behalf of the mutual interests of the group.
Sapient leaders are constantly in the eye of their peers, are judged by their peers daily, and their peers are running smart, educated, savvy businesses. The relationship matters critically to success. The leader has to be perceived by peers as wise. Like them, the leader will think like a founder.
Active strategy. In a world where markets undergo global mass differentiation, strategy has to be both continuous (as distinct from episodic) and active – in pursuit of new opportunities that emerge even in real-time.
Active strategy is also defined by the presence of active strategic portfolio management, a continuous creation of new strategic options, and knowing when to execute or to hold back. Active strategy requires a significant change in the mindset of the senior executive team and the strategy execution process.
The five dynamics of the new operating model. Finally we will talk about five dynamics of the elastic enterprise. These are business platforms (iTunes for example), business ecosystems, which we already mentioned, universal connectors (technologies that facilitate friction free commerce through automated online interactions, for example RSS feeds and application programming interfaces), Cloud computing (the new friction free IT infrastructure), and of course sapient leadership.
These new capabilities are being driven by global change and by specific technological advances. The most important are mobility and data. Although we allude to these throughout the book, we have chosen not to make this a book about mobility or data. It is specifically about how the capabilities of the elastic enterprise position businesses to exploit the new technological and global landscape of business.
It is about the transformational response to dramatically changing conditions, brought to you by highly effective business leaders.
The Elastic Enterprise
Elastic enterprises are forging the operating principles that transition us to a new form of wealth creation. They operate in a profoundly different way from companies that are still using the industrial-service model of operating.
We became interested in these organizations because of their competitiveness and performance.
Over a three year period we studied over 80 such organizations. Not all of them by any means are elastic but most are on their way to this new form of wealth generation.
Among the companies we studied are Apple, Spanish bank BBVA, Boeing, Walmart, The Guardian, Marriott, USAA, CNN, Disney, Forbes, Ford, BMW, GE, Microsoft, Nokia, Verizon, PayPal, Salesforce, Amazon, YUM! Brand, Starbucks, Netflix, Thomson Reuters, Lenovo, Kaiser Permanente, Expedia, the New York Times, Caterpillar, FedEx, Google, Amex, and SWIFT.
The best of these didn’t just grow. They didn’t just begin to enjoy their best ever years. More significantly, they began performing like no other company before them.
Apple exemplifies that success more than any other company and provides us with a working definition of the elastic enterprise:
The Elastic Enterprise involves a whole new approach to scaling a business, which we’ve described through five interlocking dynamics.
However its true defining characteristic is the ability to grow at an unprecedented rate, relative to the cost of scale (the new scale economics).
Its main avenues of growth are:
Radical adjacency, which takes companies into entirely new markets, and redefines core competency around the five dynamics;
And rapidly scaled, low friction, human interaction, and automated contractual relationships that allow new business partnerships to form instantly.
The guiding objective for senior executives in the new era should be: to seek scale without incurring the disproportionate overhead that currently accompanies growth, and to enjoy a flexibility of maneuver through radical adjacency that has not previously been possible at scale.
These qualities are visible in the case of Apple and Amazon but also in less celebrated cases such as USAA, Forbes, and Expedia.
There is no getting away from it, however, Apple is the most astounding implementation of elastic principles
Apple’s revenues in the third quarter of its 2010-2011 fiscal year were up 82% and profits were up 125%. This would be a supreme achievement at any time but the summer of 2011 was not a holiday period, where sales tend to be strong. And the economy still teetered on the edge of recession.
Apple was not just succeeding wildly. On the way to record profits, Steve Jobs’ team had created monumental disruption in a product category (smartphones) that the company had inhabited for a total of only four years. Shortly after entering smartphones, Apple created a new product category (tablets) single handedly with the launch of the iPad.
This was unusual success heaped on top of astonishing corporate performance.
Of course Apple has a history of introducing disruptive products but its original disruption, in desktop computing, was thirty years earlier when Apple was founded. Never in its history had Apple sidestepped the opposition so frequently and so effectively as the past five years.
Critically, on this occasion it did so by creating partnerships, at huge scale, through the App Store, illustrating for the first time that a new kind of scale economics could drive business.
Amazon.com is a parallel case.
With the launch of its Kindle e-book reader, Amazon suddenly converted itself into a device company, a move that would normally spell chaos.
Amazon.com had previously pioneered what became known as “platform as a service” and “cloud computing,” a revolution in how companies source their IT needs.
With these disruptive radical adjacencies, like Apple, Amazon opened new horizons for itself during a severe recession by doing what companies should not do—move into adjacent markets with entirely new products.
From early 2008 to mid-2011, Amazon roughly tripled top line revenues.
In 2010/2011, alone, Amazon’s revenues from its consumer electronics business surged 69% during an extremely weak recovery from recession.
The remarkable feature of Amazon growth was that its profits briefly fell during the period, yet its share price rose. Barron’s called it a “religion stock,” one you believe in or you don’t.
The highly conservative forces of Wall Street, the market makers, the dealmakers, the analysts and the observers voted a big yes to Amazon.com’s convention-breaking moves. Stock market seers—normally so conservative when it comes to disruption—love it.
But let’s be clear about what they love. We live in an age of hyper-innovation where every company is urged to innovate in some form or another.
Amazon is not just innovating. If it were only innovating, it would not be that different from its peers. Wall Street analysts are applauding transformational strategies, strategies that transform the way business is done. That is Amazon’s achievement, and it is Apple’s too.
Markets typically do not like disruptive change. They abhor maverick leaders. Their endorsement of Amazon.com and their love affair with Apple suggests something profoundly different is going on—a change recognized by both pioneer leaders and market analysts.
Apple, a decade back, was a wasted power in niche computing, selling its OS-leading products to universities and graphic designers.
Apple began in 2001 to build its iTunes business platform and advanced its product base with successive introductions of the iPod, and by moving aggressively into the music industry.
By 2007, Apple began the reinvention of mobile telephony, creating a whole new way of packaging and marketing software (the app), one that became so successful that sales of iPhones and iPad apps are metered in the billions.
Apple is in some sense unique, you might argue. There was only one Steve Jobs. And its position in computing was always as the outsider loved by millions. Arguably it could have sprung a surprise on the market at any time by drawing on the genius of Jobs and designer Jonathan Ive. But what Apple has been doing is instructive.
Its main advances have relied on significant investments and tight discipline in creating a business platform. Its innovation lies, in truth, in transforming not just a product, but also the way business is done.
We need to see in Apple an example of what is possible, having established a high performance platform and a strong ecosystem. These new tools mean that they are now able to make radical adjacency moves at will. They can act like predators and select from their strategic options portfolio, where and when they will strike next, not always successfully but successfully enough to be the single most admired company in the world.
Apple built its success through the platform and the ecosystem as well as its products.
But Apple itself is a great emulator of good examples.
In building out its platform (the business platform is a key dynamic of the elastic enterprise), Apple undoubtedly learned from the internal supply chain platform of Walmart and the product customization platform of Dell, two platform and global manufacturing pioneers
What Apple also showed us with iTunes and the App Store is that marketing is no longer about demographics, the A, B, C1, C2 or income-based segmentation that dominated during the era of mass marketing.
Apple’s success reflects a change in the way markets are structured.
Jobs did not set out to sell its apps to a demographic. He did something entirely unconventional and rule breaking.
Whereas in the past, a company’s supply chain, the people who contribute to its products, were kept out back, Apple put its app developers out front, next to the customer, and the two began to mix. Through the ecosystem they created a flow of ideas, products and consumer demand. The ecosystem strategy had been used before, for example by Microsoft with its Value-Added Resellers’ network. But never before in a set of open relationships in consumer markets.
Free-flowing ecosystems of producers and consumers are the new route to market segmentation, backed by advanced data analytics that let vendors aggregate and interpret buyer behavior on the fly. Flow has replaced structure.
With the iPhone Apple also created a highly componentized world that in effect makes you, the consumer, a market of 1. The relationship between a cornerstone company in an ecosystem and the consumer is itself in transition. Consumers can now self-select the communities or segments they belong to.
Only you have precisely the collection of Apps, videos and songs that sits on your phone.
Ok, so in a market of millions somebody somewhere will have duplicated your precise collection of apps, videos and songs.
But the significant change is that the customer now defines herself in this market.
Apple did not create a dozen apps and market them to you, nor try to predict all of the apps you might want. It created a platform where hundreds of thousands of developers created hundreds of thousands of options for you.
You, the market of 1, created the product mix. As you choose more apps you define the functionality and value of the product in an open-ended process of discovery that keeps pace with your needs.
This is what we mean by mass differentiation. Mass differentiation is different from mass customization.
Mass customization allows customers to adapt a mass produced product. What we are seeing in mass differentiation is a new generation of strategies that allow companies to serve many thousands of micro-markets.
That is what Apple has done with its App Store, what Google is attempting with its productivity apps marketplace, and what newspapers like The Guardian want to do with their open innovation project.
In the early days of social media the big conundrum for marketers was how to communicate with customers online. Companies did not communicate. They outsourced that to call centers. Suddenly customer activity online drew them back into personal relationships.
Mass differentiation is increasing that pressure to understand markets and to relate to customers at the most granular level.
Companies as disparate as Boeing with its new Airplane Health Management, Kaiser Permanente with its HealthConnect program, Expedia and its new affiliate programs, CNN with its next generation iReport, Forbes with its giant new blogging platform, BMW with its new mobility fund, Formula 1 engineers McLaren’s new health analytics service, are all attempting this reinvention, going beyond steady state innovations to a new way of business, serving micro-markets for the first time. To do that they are adopting the new elastic enterprise operating system.
And already you’ve seen the idea of a business platform and a business ecosystem in action (the Apple, Google, Guardian, or Amazon developer community and their new relationship with customers).
Active strategy, which we will come to later, is a consequence of these innovations. When you are addressing globally differentiated markets, strategy can no longer be episodic, annual or even bi-annual. It has to be continuous and a part of the daily diet.
The New Scale Economics
So is elasticity really about innovation or about something entirely new?
Our belief is that innovation, as practiced today, is primarily about method — how to create a new product, or service, or improve an existing one.
That doesn’t begin to describe what is taking place in elastic enterprises.
Today we live on an amped up, instantaneously connected planet. Anyone – any corporation, any government or any group – can immediately communicate and engage in complex transactions with anyone, and with the advent of M2M (Machine to Machine) commerce, anything on the planet at any time. This new reality connects people with information, ideas and knowledge without regard to boundaries.
Elastic enterprises take advantage of an instantaneously connected world to manage people and resources in new ways, to scale in ways not possible in a 20th Century enterprise and to broaden the strategic vision of enterprise wealth creation.
One of the main transformations that the elastic enterprise brings is a new form of scale. Rapid scale at low risk and low cost, infused with participation from wholly new groups of economic actors that are now being called business ecosystems.
This transformation is as important as the one Adam Smith noted 235 years ago when he saw nail makers break their tasks down into more specialized skill components.
Alongside the benefits of the division of labor, we can now have a new set of principles for how human organization can function at a super-effective level.
Large non-elastic organizations create profound dis-economies. Scale has come to equate with sclerosis because the costs associated with organizing more and more people scale more quickly than the additional wealth those people create.
Implicit in the elastic enterprise is something absolutely crucial to the new way of business—a much cheaper way of organizing people and a more efficient way of allocating resources.
We are inventing mechanisms that prioritize a new, highly scaled form of self-organization, along with new principles that govern the interchange of value between economic actors.
Pioneers of elastic business models are eliminating or at least radically reducing the old organizational overhead.
- There is no longer a fixed imperative to think of expansion in terms of new hires
- There is no need to scale infrastructure through CAPX now that we are growing a Cloud infrastructure.
- There is no need for a complex VAR, ISV or partnership model as hierarchical partnerships are replaced by business ecosystems.
- Legal partnerships are giving way to universally applicable program enrollment, for example in developer communities.
These strategies embrace new economic actors, such as the creative industries (Forbes, YouTube, The Guardian), and they embrace existing economic actors like developers (Apple, Google, Amazon) in new ways.
The new economic actors are not necessarily employees or partners. They are something in between. In fact the elastic enterprise transforms our notion of what the primary economic relationships are and can be.
It is estimated that Apple has between 100,000 and 300,000 developers working on its behalf—at their own risk. By the way, the estimates depend on whether you count who has signed up on the developer network in its lifetime (over a million) or only those that program in the native iOS programming language, Objective-C.
Suffice it to say, it’s a big number regardless of the technical details. Google also has a relatively large group of global developers for its Android OS and content creators for it YouTube ecosystem. Amazon has a growing base of programmers and technologists conversant with their Amazon Web Services Cloud ecosystem.
Forbes has 1,000 new content contributors on an incentive, rather than salaried, basis. CNN has a relationship with thousands of content creators that they do not pay. All interact with customers. Giving suppliers direct access to customers would have been anathema in the old days of doing business.
Of course this entails new relationship-building skills.
The new economic actors have to be treated well, without being pandered to. They are not just suppliers; they are a mediator of relationships with customers, and sales, a funnel for important market data, and a mechanism to serve those all-important-markets.
They are not just cheap sources of wealth production.
While many in number, they do not need a supervisory hierarchy.
Better than that, they are often impassioned sources of labor, people with real commitment to their roles and their creativity, who are capable of seeking out new ways of creating value.
They present the cornerstone enterprise with a mechanism to scale business rapidly into areas where it does not have indigenous insight and skills.
This then is not just about labor flexibility.
The new economic relationships are the basis on which radical adjacency moves are built.
And they are what allow large cornerstone enterprise like Apple to create and respond to mass differentiation.
The new scale economics are a revolution and are available to any company that depends on consumer markets, either directly or through partnerships and wants to do business in a radically new way. The challenge for many companies, though, is that they are stuck in traditional structures and processes that stand in the way of transformation.
To understand it properly, to articulate the chief characteristics of the elastic enterprise, it is important to put it in the context of change in the global economy.
The New Phase of Globalization and Mass Differentiation
The corollary of scale is that elastic organizations can and do serve micro-markets. Unlike the past, they are not scaling to serve mass markets, through mass media communications. Their operating principles allow them to grow through mass differentiation. This is so profound that we have yet to grasp its full implications.
The changing nature of global business creates an incessant demand for enterprise elasticity. Global business is digital and physical – no longer one or the other. Global business is hyper competitive, fuelled by new, fast developing markets and production centers like China.
And global business is a major source of enterprise growth. To be successful in this environment requires an enterprise to have global information and global relationship building capabilities. But ironically that global market is also fragmenting at the consumer level into many thousands of micro-markets or hyper-channels. And it is happening fast, across the globe.
As the number of users on the Internet approaches two billion or roughly 30% of the world’s total population, the opportunity, complexity and the competitive landscape for business expands dramatically.[i] For the first time the most significant change is not taking place in the advanced markets.
During the period 2000 to 2010, the number of Internet users grew at approximately 445%, with Africa leading the way at 2,357%, followed by the Middle East at 1,825% and Latin America at 1,033%, despite two global recessions during this period.
When considered in absolute terms, the number of users on the Internet is led by Asia at 825.1 million, Europe at 475.1 million, followed by North America at 266.2 million with the remaining approximately 600 million distributed across other geographies. Much of this growth has been aided, particularly in developing countries, by the emergence of low-cost mobile devices and infrastructure as the primary form of information technology, bringing more and more people into the web of scaled interaction.
Not only is this a globally interconnected world, outside the developed economies, a new middle class is emerging with unprecedented speed.
In India, according to the McKinsey Global Institute,[ii] the “average household income will triple over the next two decades and it will become the world’s 5th-largest consumer economy by 2025, up from 12th now.”
That’s on top of a decade where extreme poverty has been eradicated in many parts of the subcontinent. India’s middle class will grow from 50 million in 2010 to 585 million in 2025, reflecting a huge expansion of spending power.
If that sounds dramatic then consider this too: The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.15 billion in 2030 and what we now think of as developing economies will contribute over 93% of the global middle class, China alone contributing 52%.
The “scale-value” of products increases also, becoming more dynamic and perhaps even unpredictable. What one person loves can become a phenomenon that millions love in a matter minutes or days. Product launches have become globally shared events accompanied by unprecedented adoption and participation rates.
Indigenous business communities and related experience are also growing globally. For the last eight years, The World Bank has been tracking business regulations in 183 countries to understand the ease of doing business in various regions, nations and cities. The latest study, Doing Business 2011: Making a Difference for Entrepreneurs, reported that from 2005 to 2010, the “doing business score” has advanced significantly in 85% of the nations studied. Other studies of global economic growth[iii] point to similar conclusions.
Although not uniformly distributed, most areas of the world are embarking on global growth. The prognosis for overall improvement in income levels in developing countries and the corresponding increase in indigent purchasing power is positive.
Taken together, these global economic factors create favorable conditions for the emergence of the elastic enterprise based around business platforms, business ecosystems, universal connectors, cloud infrastructure and new leadership.
With diverse and distant global markets, companies can attract and delight customers anywhere, any time. If business models don’t change then the time and cost of capturing these markets might make them effectively inaccessible. Companies will be able to scale up their operations while simultaneously managing smaller markets that may have real diseconomies of scale.[iv]
In fact, one of the underlying market conditions is a new degree of market heterogeneity that is both geographic and extends beyond geography.
As well as having to serve many diverse markets around the world, companies must also appeal to a new level of intra-market differentiation. People are demanding even more differentiated lifestyles, and are able to source “differentness” via the web.
Companies need to think in terms of more product variety and more products that meet a wider array of customer needs.
This is true for all products in a complex world of diverse global demands.
Pharmaceuticals are a perfect example of the need for mass differentiation and the cost of not building up a platform for delivering it.
All prescription drugs have to go through three phases of clinical trial before approval.
In the case of cancer treatment, many trials show surprisingly good results for a small portion of the trial population. However, if, for example, three people from a population of 40 enjoy spectacular outcomes for a trial medicine, the trial is considered a spectacular failure. No drug would progress from here to approval.
Consider though that those three people might represent some form of cure for people like them.
The other thirty-seven people clearly need another form of treatment. The three however represent a perfect case of mass differentiation—added to all the people of that type globally; the trial medicine might well be a breakthrough.
Our current conception of mass markets forces us to reject that drug. We perceive only one type of patient. We treat the three as flukes.
In a world of massive computational power, the consequence of this finding should be to identify more people like the three rather than to reject the drug.
If that were to happen, it might mean that a population of 40 people needs 15 types of treatment, i.e., mass differentiation.
However, our mass production-era sensibilities prevent us from seeing the value of mass differentiation because we are programmed to drive towards a one-size-fits-all formula for most products.
Businesses must forge new business models and modes of operation that can reach a growing, diversifying and developing world population of customers. They have to move beyond old classifications—old notions of customer income groups or class divisions—to serve a market of mass differentiation.
They must create flexibility that moves the focal point of competitiveness away from employed labor towards people with the aspiration to own and operate their own companies or with the talent to solve customer problems, often in micro-markets.
In the process, they must create a new foundation that incorporates the creativity and innovation of a globally interconnected community. They need to establish an effective global presence in the physical and digital worlds.
And they must find ways to operate outside the business cycle, with a new kind of elasticity that is not based on hire and fire but is more self-regulating and dependent on the laws and dependencies of self-sustaining ecosystems.
These are the conditions that we believe are fast emerging around us. The elastic enterprise helps leaders to exploit markets more effectively because those leaders recognize the heterogeneous nature of markets and the similarities of middle class aspirations.
To use a term first coined eight years ago, they see that the long tail is now the main market and that means the market is comprised of many thousands of niches large enough for global organizations to exploit.
We are going to argue that the elastic enterprise is an organic response to those market conditions.
Beyond Innovation: Transformation and the Leap to The Elastic Enterprise
The mantra of the past decade has been innovation. A widespread expectation, or hope, has been that innovation will bring companies closer to aligning with the demands of a new economic environment.
The elastic enterprise is clearly about innovation but it is an important step beyond it too. We are at a point in the development of enterprises where companies must transform first in order to innovate at the level of creativity and execution they need in order to be competitive.
The problem we identify with innovation, as we said earlier, is that, by and large, most writers on the topic are talking about method rather than transformational trends.
In order to innovate, you need a method. But simply layering methods of innovation on old structures is counterproductive.
Innovation, as a movement, has become a search for methods for improving the existing model of business.
Innovation choices, such as ideation platforms or Six Sigma, or even open innovation all have substantial value but they are not a route to the breakthrough required to be a winner in the 21st century.
They work well within the existing wealth creation models but ironically innovation efforts often become a vehicle for reinforcing the status quo.
The innovation that companies need is fundamental, systemic and transformational.
Their dilemma is not about a search for new ideas. Most companies have access to plenty of ideas. It is about adapting to radically new business conditions and opportunities. Right now, business needs to make a leap to the elastic enterprise.
The elastic enterprises that we discuss in this book are transformational. They produce breakthrough business processes, concepts, products and services.
When elastic enterprises innovate they do not do it piecemeal or incrementally, nor do they innovate simply to beat the competition. They innovate to alter or control market conditions in new ways.
Every company and every organization has access to the capabilities that elastic enterprises have pioneered.
The common thread running through all business and organizational life is the ability to exploit a convergence of network technology, mobility and human ecosystems, supported by business platforms and universal connectors. Together these dynamics help to renew the system of wealth creation and to rebuild competitiveness on a completely different scale, at an entirely new pace.
Built into the system are techniques that allow large numbers of contractual business relationships to develop at little overhead cost, either in terms of the legal process of establishing business relationships or the emotional cost of managing them. Those 300,000 developer contracts Apple has—they were created automatically, at least in the legalistic sense. Driving business friction out is an important new, competitive weapon.
These platforms and ecosystems are quickly being augmented by Cloud computing.
For example, USAA, the giant U.S. insurer, was able to put together a profitable and extremely compelling new service that provides customers with comparative data on actual car purchase prices. Imagine being able to buy a car knowing what other people are actually paying. It worked for USAA, so within a year of its car data service opening for business, it moved on and created a second adjacent service providing comparative data on actual house purchase prices.
Put together at low cost, these ecosystem businesses can also be broken down quickly. It provides a level of agility few would have dreamed of until recently.
The Elastic Enterprise documents and interprets these developments and suggests ways that executives can build on them[v]. While The Elastic Enterprise is a result of our research observations and thinking, it’s not the final word, it’s just the beginning. Even at this stage though it is apparent that key identifiable differences in operating models separate winners from losers.
THE MAINPOINTS REVIEWED:
Highly competitive companies have prospered through the tough years by transforming their basic operational processes, by becoming elastic.
The elastic enterprise can scale its operations without a parallel increase in overhead. These are the new scale economics — growth without a crippling increase in complexity management.
In the new global market companies must also serve customer markets in new ways, they must address mass differentiation, they must segment markets in new ways and create the capacity to serve many micro-markets, globally.
Successful companies have gone beyond innovation to transformation. To remain competitive every company needs to adopt a simple transformational model that we will explain in the coming chapters.
To get a feel for how close you are to an elastic enterprise or how big a cultural shift awaits it is useful to ask:
1. Is our operating model adaptable or fixed?
2. How do we initiate process transformation? Outside in, or, inside out?
3. Do we focus our innovation efforts mostly on methods for how to improve our products and services?
4. Who do we use as models for how to grow our business?
5. Do we benchmark or do we seek transformational opportunities?
6. Are we in the key performance indicators game or do we have a more conceptual approach to assessing our future prospects?
7. What type of thought leadership do we aspire to?
8. How closely aligned is out IT department with our business objectives?
9. Is there conflict between IT and business or are we using the CIO office strategically to promote growth?
10. How well do we understand global markets?
11. Do we have access to micro-markets?
12. What hyper channel strategies do we have?
13. Do we think about APIs and their role in hyper channel strategies?
[i] Consider also that during the period 2000 to 2010, the number of users on the Internet grew by approximately 445% with Africa leading the way at 2,357%, followed by the Middle East at 1,825% and Latin America at 1,033%. All other regions of the world grew at levels well under 1,000%. When considered in absolute terms, the number of users on the Internet are led by Asia at 825.1 million, Europe at 475.1 million, followed by North America at 266.2 million with the remaining approximately 600 million distributed across other geographies.
[ii] Eric D. Beinhocker, Diana Farrell and Adil S. Zainulbhai, “Tracking The Growth of India’s Middle Class,” McKinsey Quarterly, August 2007.
[iii] For example, Hans Rosling (see http://www.youtube.com/watch?v=jbkSRLYSojo), a noted authority on global health and development and statistician, also sees continued global economic growth. However, he like others, such as Dani Rodrik (see http://rodrik.typepad.com/dani_rodriks_weblog/2007/11/doing-growth-di.html), also see a variety of impediments that must be solved for long-term sustainability, such as health, education, marketable skill development, new forms of energy, and sustainable population growth, and, most important, long-term level of investment. See also the UN’s Millennium Development Goals (www.un.org/millenniumgoals/reports.shtml).
[iv] The advantages of the economics of scale and its relationship to productivity and growth are well understood, having formed the foundations of the industrial business model. However, an opposing and vexing issue, often not discussed, is the problem of diseconomies of scale. Diseconomies of scale refer to the inability of scale enterprises (i.e., large organizations) to nurture and support small-scale activities.
[v] Haydn Shaughnessy and Nick Vitalari, Succeeding in the Age of HyperInnovation, Moxie Insight, 2011; Nicholas Vitalari, Platform Business: Outpacing Competitors and Harnessing the Global Community, Moxie Insight, 2011; Nicholas Vitalari and Laura Carrillo, IT Management in a Next Generation Enterprise, nGenera, 2009; Haydn Shaughnessy, Rethinking the Brand in the Age of Consumer Empowerment, nGenera, 2009; Haydn Shaughnessy, Open Management and the Enterprise Ecosystem, nGenera, 2010; Jeff DeChambeau, Naumi Haque, Nicholas Vitalari, Continuous Strategy for a Networked World, Moxie Insight, 2010.