Discerning Change

Opportunities for change are discovered, rarely manufactured.

To build a successful business, you have to overcome your competitors; to successfully change, you need to overcome yourself. Unfortunately, change is often the hardest to muster when it is needed the most.

Why is change needed? How can we determine which ones to back? Perhaps most importantly, what are the telltale signs of when it might be essential?

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Although change often fails to bear fruit, a sure sign of a dud is when it is being sold. Be sceptical of those who claim to be able to conjure up visions and change on-demand, risk-free, all without the need for commitment.

Successful change is something to be discovered or clarified but rarely manufactured.

Why is change needed anyway?

Businesses initially succeed when they discover a consistent way (business model) to generate profit from creating a want (the product/service) to meet a need. Over time, competitors enter to address the same need by imitating existing models/wants or creating new ones. Eventually, all markets mature as better models/wants thrive, and weaker ones die out, leaving a handful that has stood the test of time.

The problem with having only a handful of models/wants is that it encourages competition in the same way:¹

1. Each product cycle becomes progressively expensive as technology is pushed past the point of diminishing returns. E.g. My current phone is now more powerful than my laptop but does not do anything new - I still use it for the same things, in the same way as my last five phones.
   

2. Customers become accustomed to equating “better” with the factors that define the market. E.g. Obviously, a 3,000 nit TV has got to be better (more valuable) than a 2,000 nit one! (Are those nits really needed? A typical laptop display is around 500nits - will there be a moment of reckoning when the perceived value falls short of actual utility?)
   

3. Increasingly sophisticated methods are employed to optimise, which introduces fragility. E.g. What happens to a fine-tuned supply chain when delivery of raw materials suddenly becomes unpredictable?

Imagine a world where all businesses in the automobile market operate under the same model/cars, with everyone pursuing the same opportunities and suffering the same vulnerabilities. Would there be autonomous electrical vehicles or just better petrol/diesel cars? What then would happen when we finally decide that fossil fuels are no longer an option?

Change introduces diversity that is lost through market maturation. Alas diversity is resilience.

Why are we geared to grind?

Two mechanisms also drive market maturity from within the organisation:

• The conflation of leadership with management
  A leader is responsible for setting direction, whereas the manager is responsible for effective execution. One is focused on taking calculated risks, whereas the other is on minimising them. Both are distinct and equally necessary.
  

• “What you measure is what you get”²
  Key performance indicators (KPIs) focus on management - e.g. high consistency, efficiency or output. KPIs are rarely implemented to encourage the opposite. Furthermore, not all essential factors to success can be easily quantified (e.g. purpose, cohesion, drive). KPIs contributes to but should not be the complete definition of success.

Does modern-day capitalism encourage the correct reward structure?

How to discern change?

Not all seeds sprout or bear fruit - how do we weed out the duds?

1. Is the reason for change an organisational or a “change agent” thing?

Meaningful change is greater than an individual. Human commitment, no matter how well-intended, is finite and frequently overestimated; however, change necessitated by external factors are independent of individual interests.

bp is undergoing an ambitious transformation (starting in February 2020), beginning with a redefinition of its business model from the traditional “upstream-downstream” to one that focuses on energy transition.

I am optimistic about the success of this particular initiative - not because of proclamations by public relations (yes, I have read the articles too!), but because of the external consensus around EVs. This particular transition feels like an inescapable transform or die situation. Of course, only time will tell.

2. What is everyone competing on?

A ubiquitous set of factors that define your market can be a sign of market maturation. However, the type of factor may also play a role. Brand laddering suggests that there are different types of factors, ranked by levels of abstraction:

• Societal - How does it change society?
  I buy Patagonia mountaineering gear because I am helping the planet (through their outreach and second-hand market programmes).
  

• Emotional - How does it make me feel?
  I buy Patagonia mountaineering gear because they are a solid brand I can trust when climbing up a mountainside.
  

• Benefit - What does it do for me?
  I buy Patagonia mountaineering gear because they keep me warm and dry.
  

• Attributes - What has it got?
  I buy Patagonia mountaineering gear because they use GORE-TEX fabric.

The challenge with lower-level values (e.g. attributes) is that it invites direct competition, whereas the more abstract factors are usually much more difficult to substitute. If you offer a laptop with 16GB of memory, I can always offer one with 32GB. However, competing on societal values (e.g. repairability and reducing e-waste) requires changing engineering competencies, not just more of the same engineering.

Businesses that find themselves competing primarily on material factors need to think very carefully about their value proposition, particularly how sustainable it is.

3. Are you comfortable with all your eggs in one proposition basket?

Both yes, and no could be sensible answers:

• No change: Yes, and that is fine.
  Rolex has a single proposition - luxury timekeeping. The business has a singular focus, consistently resisting opportunities for diversification. The decision is a calculated risk, but one that the business seems completely aligned to³, and deeply comfortable with.
  

• Change: No, and we are actively diversifying
  Garmin quickly realised that smartphones better address the need to navigate. Google/Apple Maps is always up to date, shows real-time public transport information, even helps locate friends and family - all great features that dedicated devices cannot provide. Unlike TomTom, Garmin (devices) has actively and arguably successfully diversified into “devices for activities and sports” - the proposition is no longer just navigation but also health monitoring.

Here, the only wrong decision is to hesitate.

Change is supposed to be painful, but when it is needed, the alternative is much, much worse.

1. Porter wrote about this in Competitive Strategy, and the concept is further elaborated by D’Aveni.

p.178 and p.237. Michael E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. 1st ed. New York, NY, USA: The Free Press. https://play.google.com/books/reader?id=Hn1kNE0OcGsC.

D’Aveni, Richard A. 2010. Hypercompetition: Managing the Dynamics of Strategic Maneuvering. 1st, Google ed. Simon and Schuster. https://play.google.com/books/reader?id=gGsqdN8mexoC.

2. Kaplan and Norton argue that there is more to performance than economic performance; however, I do not think Balanced Score Card goes far enough.

Kaplan, Robert S., and David P. Norton. 1992. ‘The Balanced Scorecard—Measures That Drive Performance’. Harvard Business Review 1992 (January-February). https://hbr.org/1992/01/the-balanced-scorecard-measures-that-drive-performance-2.

3. Rolex SA is wholly owned by the Hans Wilsdorf Foundation and is not required to disclose operational information (e.g. annual, or strategic reports). However, their product history tells a consistent story.

https://www.rolex.com/about-rolex-watches.html

Cover photo by davide ragusa on Unsplash