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 just two. They 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’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.
In Amazon’s case, there is a similar tale of total novelty. With the launch of the Kindle ebook reader, the online retailer suddenly converted itself into a device company, a move that would normally spell chaos. At the same time Amazon also pioneered what became known as “platform as a service” and “cloud computing”, a revolution in how companies source their IT needs. Like Apple it opened new horizons for itself during the recession by doing what companies should not do – move into adjaceny markets with entirely new products.
In 2010/2011 Amazon’s revenues from its consumer electronics business line surged 69%, during an extremely weak recovery from recession. The remarkable feature of Amazon’s growth is 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 don’t.
So why do people believe, and what is it people believe in? What is the bigger story behind these and similar successes?
Amazon.com’s strategy over the years 2007 – 2011 flies in the face of convention. Instead of sticking with what it knows best, as convention demands, the company twice stepped substantially outside of its core business – organizing customer data to sell more books and gadgets – to pioneer technology infrastructure services and simultaneously to develop its own physical device. These are moves you are encouraged not to make. Yet Amazon.com can now lay claim to owning the ebook market as well as pioneering an entirely new way of organizing the information technology infrastructure and services of large and small companies.
The highly conservative forces of Wall St, the market makers, the deal makers, the analysts and observers, voted a big yes to Amazon.com’s convention-breaking moves.
The stock market believes that Amazon.com’s management is capable of doing what firms should not do – step outside their core competency and innovate in markets that are radically different from the ones they have already mastered.
The 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 other. But Amazon is not just innovating. If it were only innovating it would be little different from its peers. Wall St analysts are not actually voting for innovation here. They 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 and the love affair with Apple suggests something profoundly different is going on, a change recognized by pioneer leaders and by market analysts.
Apple, a decade back, was a wasted power in niche computing, selling its OS-leading products to universities and graphic designers. 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 iPhone and iPad apps’ are metered in the billions.
What Apple showed us with the Apps 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. Apple did not set out to sell its apps to a demographic. It did something entirely different 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 apps developers out front, next to the customer, and the two began to mix. Apple created a flow of ideas, products and consumer demand in a free flowing ecosystem.
Free flowing ecosystems of producers and consumers are the new route to market segmentation, backed by advanced analytics that let vendors aggregate and interpret buyer behaviour, on the fly. Flow has replaced structure.
But what does this mean outside of Apple’s gilded world
The first thing it signals is that markets have changed dramatically. In fact we will see in the next chapter there is a new global middle class, an emerging market of the reasonably well-healed which will be three times the size of today’s global middle class within two decades. What we used to think of as a stable middle market is fragmenting, declining in the USA and in Europe, spending rapidly in emerged economies like India and China.
This new middle class is imposing its will on the market and it is saying things like: we definitely want on-tap global communications, we admire style, and we want choice.
Imagine a world where the people who made anti-lock brakes, leather seats or fenders were in your ecosystem, not Ford’s or GMs. Or imagine at least that you share a relationship with those suppliers. Now instead of you buying a Ford or a GM fully kitted out, you are specifying which parts you wanted to have installed.
In principle, that’s what Apple did to mobile telephony and the path it blazed has already been taken up by Ford and GM, Toyota and Fiat, at least in the software side of what goes into your car.
There’s no question in our minds that ultimately car makers will have to componentise their hardware too but that’s a story for another day.
This new way of doing business, the rule breaking and the disregard for convention, is not confined to the obvious champions like Apple and Amazon.com. Companies as disparate as Boeing with its new Aircraft Health Service, Kaiser Permanente with its HealthConnect program, CNN the news company with its next generation iReport that draws viewers into an ecosystem with citizen reporters, Forbes with its giant new blogging platform, Formula one racing stars McLaren with their new health analytics service, are all attempting this reinvention, going beyond steady state innovations to a new way of business.
These companies are pioneering a new form of wealth creation, one we’ve called The Elastic Enterprise. We’ll come on to why we choose that title. What we want to do for the rest of this book is engage you in a discussion about what the elastic enterprise, the new form of wealth creation, actually is and how executives at large can adopt its core principles.
Among the many questions asked about the success of Apple and Amazon.com, one of the most overlooked is: how can these companies succeed during the teeth of a recession worse than any we’ve known in our lifetimes? We need to ask it not just of these stellar successes. How have the growing band of pioneers like Kaiser, CNN, Forbes, Mclaren and more, been able to go beyond innovation to create new structures for their businesses, new ways of organising resources, new relationships with suppliers and customers? The answer lies in the five pillars of the elastic enterprise, which make up the core of this book.
Beyond Innovation: The Elastic Enterprise at Work
Today we live on an amped-up, hyper-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 commerce, any thing, or any company on the planet at any time. This new reality connects people with information, ideas and knowledge without regard to boundaries – enterprise, organizational, or national.
In this hyper-connected world our attention is inevitably drawn to the new significance of innovation and ideas. We live in an age of ideas. Witness TED, the Economist Ideas site, SXSW, DLD. Acrpss the world the ideas’ fest is the new rock and roll.
We want to suggest, perhaps heretically, that the generation of ideas, the practice of innovation and perhaps even collaboration, are three pillars of static state innovation. They are the wrong place for us to be looking for transformational change. Innovation can make the current system of wealth creation work more effectively but it is not the place to look if you want to transition and to take on the mantle of success in hard times.
Innovation can improve old structures and processes. Yet these processes are the biggest barrier to change, and to growth. The organisational form that served us well in the 20th century is, often, now a burden. The hierarchical corporation of the 20th century is proving to be counter productive in the 21st.
Large organizations create profound dis-economies. Scale becomes the enemy of efficiency and progress as each unit of growth leads to new layers of bureaucracy to control costs, to supervise labour, to learn the new functionalities of a rapidly changing IT world.
Scale is the enemy unless, of course, you operate in a command economy like China. Scale equals sclerosis because the costs associated with organising more and more people scale more quickly than the additional wealth those people create. Even young companies like Google, with profoundly new ideas about management, have been caught out by the sclerosis of scale.
Implicit in the new environment evolving around Apple and Amazon is something absolutely crucial to the new way of business – a much cheaper way of organizing people.
The connected world allows us to organize in new ways. The hyper-connected environment actually presents us with an even bigger advantage that that – a new way of people organising themselves. In the connected world there are many efficiencies but self-organization has to be the most profound.
How widely used is self-organization? We are in the middle of a revolution where many people self-organise on platforms like Facebook, Ning, Google Plus, LinkedIn, and World of Warcraft. As users and consumers we have already moved beyond the old limitations of scale. But when we go into work…. the story is still very 20th century.
Most of our enterprises still persist in business strategies, procedures and operations that were pioneered and perfected before the Internet came along. As one CEO of a large industrial company put it: “I don’t know how much longer I can drag my 19th Century corporation into the 21st Century with any hope of sustainable competitive success.”
Most executives, in fact, share this sentiment. Now is the time to innovate and change. Now is the time to move to a new way of doing business. But here comes the disconnect.
Most companies are talking about innovation without changing very much. Innovation is part of the status quo.
There are plenty of reasons for that. But one overwhelming reason is that most companies are approaching innovation as a method rather than a transformational journey.
Pioneers of new business models are changing the way we go about scaling wealth creation by eliminating or at least radically reducing the organizational overhead and then building new strategies from there. Apple has over 300,000 developers working on its behalf – at their own risk. Forbes has 1,000 new contributors on an incentive rather than salaried basis. CNN has a relationship with thousands of content creators that they do not pay.
These are not just cheap sources of wealth production, sometimes free, sometimes not. 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. But perhaps most important, they present the core enterprise with a mechanism to scale business rapidly. And if necessary to shrink business too.
This is a new model of business. It fundamentally alters the rules of resource allocation,organization and the cost and risk of doing business at scale. It transforms the potential pace at which companies can grow.
It is a revolution and it is available to any company that wants to do business in a radically new way. The challenge for many companies though is they are stuck on innovation.
What we want to do in this book though is to introduce the main structures, or pillars, of the new way of business. We want to by-pas the innovation debate because we are convinced that the elastic enterprise is a replicable model for scaling wealth. We’re convinced it holds the answers to many of the most pressing challenges of American and European society.
To scale rapidly at low risk and low cost. That is as important a transformation as the one Adam Smith noted 240 years ago when he saw nail makers break their tasks down into smaller skill components. Alongside the benefits of the division of labour we can now set a new set of principles for how human organisation can function at a super-effective level.
To understand it properly, to articulate the chief characteristics of the elastic enterprise, it is important to set it alongside what most companies are actually trying to do. The mantra of the decade is innovation. The elastic enterprise is clearly about innovation but it is an important step beyond it too.
Innovation thinking in the second decade of the 20th century is prolific and as one observer, the Danish designer Jens Martin Skibsted has observed, has almost become infectious. Everybody is getting innovation.
The problem we identify with innovation 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 in order to transform you need to identify many new structural pillars.
You need to identify the key structural changes taking place in the global economy (because your markets are likely to be global); you need an awareness of how these various markets are evolving, and the deep novelty of consumer needs, you need to see markets in new ways. You might have to realign yourself with some part of those markets, recognising that key creators are out there among your customers. You need to rethinking technological expertise because the way to move quickly on new opportunity is through aligning yourself with adaptive technology infrastructures that you might not own. In fact you might have to regard ‘infrastructure’ in new ways, seeing your key IT assets not as your own but as a service provided from elsewhere.
Innovation by way of contrast has become a search for methods of 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 systemic change. They work well within the existing wealth creation model.
The innovation companies need though is fundamental, systemic and transformational. Their dilemma is not about a search for new ideas. It is about adapting to radically new business conditions and opportunities. Right now, business needs a leap to the elastic enterprise.
Even as we are still preoccupied with economic upheaval and uncertainty, the seeds of a new way of doing business have grown.
During the the most dramatic economic turbulence since the Great Depression, Apple grew into one of the most valuable technology companies in the world vying with Exxon to be the most valuable company, full stop. Enterprising smaller companies like McClaren, began adapting their expertise in high performance automotive and race diagnostics to health telematics. Caterpillar, a company that might be in the start phase of renewal, has used economic turmoil to innovate its core business model through an intelligent business platform that allows tracks and monitors heavy equipment in remote, hostile conditions, ultimately paving the way to a global platform for automated equipment use.
Across the developing world in India, Africa, Latin American and Asia, new companies have leaped beyond the legacy business models of our industrial past. Outside of North America, especially in mobile communications, 21st century business models are powering speed, agility, and scalable capabilities for the bottom of the pyramid.
The common thread is that companies can now exploit a rare convergence of network technology, and human “ecosystems” to renew the system of wealth creation, and to rebuild competitiveness on a completely different scale, with a new level of speed.
We call this new form of business the elastic enterprise, to indicate many new qualities.
An elastic enterprise can expand business exponentially relative to its cost base, but equally the elastic enterprise is easier to shrink. Companies can even abandon lines of business that no longer perform, with unprecedented ease. Companies that adopt the principles of the elastic enterprise can reallocate resources faster and cheaper with less disruption to employees and the business.
They can manage a broader range of businesses because they are not heavily invested in process at every phase in the scaling of their business. They can realise what we will call in this book radical adjacency strategies, moving into markets where they have no traditional strength and they can do it with relative ease. Like M&A and venture capital investments, radical adjacencies are primed for failure, at least in the past they were. Today’s elastic enterprise seems able to take them in its stride.
The elastic enterprise is driven by new business platforms and by human and organizational ecosystems that operate in largely frictionless ways. Built into the system of platform business 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 contrasts Apple has – they were created automatically. Driving business friction out is an important new, competitive weapon.
These platforms and ecosystems are quickly being augmented by other advantageous developments such as cloud computing and a new approach to employment and talent recruitment. For example, USAA, the giant US 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 almost immediately they moved on and created a second adjacent service providing comparative data on actual house purchase prices, within a year of its car data service opening for business.
USAA achieved this agility so by combining a collection of third-party services and business platforms with its own business platform. The services allowed USAA clients new insights into what was a fair, market price in their localities, and gave customers data-driven guidance to support them in negotiating the two biggest purchases of their lives.
Put together at low cost these ecosystem businesses can also be broken down quickly. It means that fail fast and fail cheap, the mantra of the web start-up, has migrated to the large corporation and to multiparty collaboration between large enterprises. 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. We’ve been studying the elastic enterprise over a three year period as part of our work in a business think tank, formerly nGenera, now Moxie Insights, and in our commercial work with client companies. We come from slightly different background. Nick is a former professor at UC Irvine, Haydn is a journalist and documentary maker, in the distant past, and more recently a business researcher and writer. Together we have studied business platforms, business ecosystems, leadership cognitive processes, and the IT industry1, all highly relevant to our theme.
The Elastic Enterprise is a result of our research observations, and thinking, but we don’t want it to be a last word in any sense. We are publishing the Elastic Enterprise online and in eBook form so that we can create a discussion around the key principles we are going to outline from here on.
Stay with us for the conversation on how businesses are finally developing an alternative model of wealth creation.
1Haydn Shaughnessy and Nick Vitalari: Succeeding in the Age of HyperInnovation, Moxie Insight 2011; Nick Vitalari and Laura Carillo IT Management in a Next Generation Enterprise, nGenera 2009, Haydn Shaughnessy Rethinking the Brand in the age of Consumer Empowerment, Moxie Insight 2009, Haydn Shaughnessy Open Management and the Enterprise Ecosystem, nGenera 2010, Jeff de Chambeau, Naumi Haque, Nick Vitalari, Continuous Strategy for a Networked World, Moxie Insight 2010