Look at nature, plants, animals, and humans grow very slowly, even the fastest growing ones, just grow so much. All of this coded our behaviours and our reactions to our environment. Hunters and gatherers traced animals linearly to hunt them. Very similarly with plants and seeds and with their families.
Our exposure to exponential is a phenomenon of the 20th century. The space race and of course Moore’s Law, the rise of the semiconductor and computers. Doubling computing power every 18 to 24 months not just triggered technological advancement, but it definitely enabled economical growth, prosperity, employment, and severe change in the world and its people.
Incumbents and very large enterprises coming from the 20th century or older, have their issues with exponential growth. Because they are used and simply doomed to linear growth, surely and steadily. That is what the stock market and boards like, and that’s what CEO’s are compensated for.
This changed with the rise of the internet and the dot.com bubble first inflate and then burst. But after the first bubble burst, there was the second boom, and after the financial crisis, there was even the third boom. Now, the pandemic added even on top of those waves another layer of digital-born and pure-play digital scale-up, so called unicorns.
As of today (August 2021) tiktok is now the most downloaded mobile application on the planet, telling a whole new reality. The next big thing will be even bigger and reach billions of users even faster. Sky is the limit.
Now. Why all this introduction about linearity versus exponentiality? Because that makes all the difference. 20th century born companies don’t get it, and most of the times, it’s too late, when they realise something is going on.
Let’s examine why, how, and what happened to KODAK, the once incumbent chemical and innovation company, famous for the de facto leadership in photography.
One of the most famous examples, Kodak, actually saw the change coming. At the time, the company’s senior management requested a market analysis. The report concluded that digital photography had the potential to disrupt, but not in the upcoming ten years, which felt like enough time for the Kodak management.
And the company invested in digital. Kodak Research Labs invested in many innovative digital camera projects, however all the projects were under-appreciated because the digital picture quality did not meet the prints at the time.
The biggest problem that made Kodak was to not think outside their business model’s walls. The company invested so much into the print business that they acquired chemical companies and tailored their entire value chain to profit off printing. As the investment grew, Kodak management’s ability to think holistically shrank dramatically that they failed to tap into the customer demand and the market trend.
Another very famous disaster is NOKIA, the telecom technologies giant, once leader in mobile devices, wiped away almost overnight. How did this happen?
While Nokia made the bet that QWERTY keypad layouts were here to stay instead of the touch screen, the management did not feel comfortable with the decisions made and was worried about the rising star Apple, which only had the %5 of the mobile phone market share at the time.
However, the overly complex matrix organization of Nokia made mid-management fear to tell the truth, the top management to only focus on their quarter targets, and executives to not admit their inferior operating system.
When the company finally internalized its defeat, it was too late. Nokia heavily invested in software and hardware innovations, but the competition was already there. Moreover, they failed to create sustainable innovation strategy by either focusing on the competition or creating moonshots projects, such as Internet of Things, which none of them returned any business value.
Last of these famous and numerous examples is BLOCKBUSTER. The de facto standard in video rental overlooked the verge of streaming. Reed Hastings knocked the doors but didn’t get heard. This is exactly that inertia of market leaders, becoming arrogant and ignorant about what’s going on beyond their own boundaries and unfortunately limited visions.
Blockbuster was once valued as a $3 billion company and earning $800 million in late fees alone in a year. Once it became a hit, the leadership opened up many stores around the States and even invested in a $6 million distribution center to personalize each store’s title portfolio according to its local demographics.
As customer-centric as it sounds, the business model of Blockbuster was fundamentally putting the customer at the other end of the table. The late fees charged to the customer was the biggest source of revenue, which eventually became the company’s Achilles heel.
Netflix at the time was founded to enjoy the videos at home without getting penalized for it. By eliminating the late fees and heavy capital investment of brick and mortar stores, Netflix managed to create a more profitable model while putting the customer and its needs at the centre, which led to the doom of Blockbuster.
As these examples demonstrate, leading incumbents rest on their past victories and often miss the trends. Vanity, inertia, and habits become inhibitors for change. As long as they grow, generate some profits, and deliver on shareholders’ expectations, all is good. But it’s not. It’s a warning signal for disaster, most of the times.
You must listen to what customer says, and then adapt and evolve. Whether you bet against or for the market, make sure you know your customers’ wants and needs. Be intentional with it.
If you don’t believe that you can change the mothership, then set off some squad teams in zodiacs and let them try their chances. Think of this like an investment portfolio manager or even better just like a venture capitalist. They have baskets of ideas, baskets of investments. They know that not all of them will succeed or perform well. But they try it out anyway.
They are also ruthless in terminating an idea, a team, or an investment, when the realise that it will not perform. So, they can focus their attention, the talent, and their resources in the most potential ones. One of these zodiacs may turn into a bigger ship and may even outperform the mothership. So, let it be.
Exponential technologies enable exponential growth, for those who embrace it and ride the wave. For laggards it also causes exponential (in some cases existential) disaster. You decide which route to go. But don’t complain. You are the master of your destiny. Good luck. May the digital forces be with you.