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The Day Before Your Defeat

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It is difficult to realise exponential growth. Most natural phenomena are linear. Acceleration, for example, occurs from point A to point B. In the case of a race car, a cheetah, or a sprinter, no matter how fast or how slow, organisms travel and accelerate in a linear fashion; steadily gaining momentum, and reach a terminal velocity. After the maximum point of acceleration is achieved, the organism or object slows down and stops.  

Look at how nature, plants, animals, and humans grow very slowly; even those that grow very quickly, only grow to a certain point. All of this has coded our behaviours and our reactions into our environment. Hunters and gatherers trace animals linearly to hunt them. Plants pollenate in a very similar way.  

Exponential growth is a phenomenon of the 20th century. Throughout the 20th century, Moore’s Law, the rise of the semiconductor, the development of computers, and the space race have all contributed to the phenomenon of exponential growth. Doubling computing power every 18 to 24 months not only triggered technological advancement, but it enabled economic growth, prosperity, employment, and global change.  

Incumbents and exceptionally large enterprises originating from the 20th century or older, have their issues with exponential growth. These companies are used and simply doomed to linear growth, surely and steadily. That is what the stock market trends and board members prefer, and that is what CEOs are compensated for.  

This changed with the rise of the internet and the first inflation-then-burst of the dot-com bubble. But after the first bubble burst, there was a second boom, and after the financial crisis, there was even a third boom. Now, the pandemic added yet another layer of digital-born and pure-play digital scale-up; the so-called unicorns.  

As of August 2021, TikTok is now the most downloaded mobile application on the planet. The next big thing will always be even more impactful than the last, and reach billions of users even faster than before. Now more than ever, the sky is truly the limit.  

Now. Why all this introduction about linear growth versus exponential growth? Well, the distinction makes all the difference. 20th century born companies don’t understand exponential digital growth, and most of the time it is too late, when they realise there is a problem with their linear thinking.  

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Let us examine why, how, and what happened to Kodak, the once incumbent chemical and innovation company, famous for their de facto leadership in photography.  

Kodak actually saw the digital 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 within the next ten years, which felt like enough time for the Kodak management team to plan ahead.  

The company proceeded to invest 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 standards of the prints at the time.  

The biggest mistake that Kodak made was to not think outside the walls of their business model. The company invested so much in the print business that they acquired chemical companies and tailored their entire value chain to profit off of printing photographs. As investment grew, the Kodak management’s ability to think holistically shrank so dramatically that they failed to tap into the customer demand and market trend.  

Another famous disaster is NOKIA, the telecom technologies giant, a once leader in mobile devices. Their company was wiped away almost overnight. How did this happen? 

While Nokia made the bet that the QWERTY keypad layouts were here to stay instead of the touch screen, 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 caused mid-management afraid 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 had heavily invested in software and hardware innovation, but the competition was already there. Moreover, they failed to create sustainable innovation strategy by either focusing on the competition or creating moonshot projects, such as the Internet of Things, which none of them returned any business value.  

The last of these famous and numerous examples is Blockbuster. The de facto standard in video rental overlooked the onset of streaming services. Reed Hastings had been knocking on the right doors but  was having a difficult time getting heard. This is exactly the inertia of market leaders, who had become arrogant and ignorant about what’s going on beyond their own boundaries and limited visions.  

Blockbuster was once valued as a $3 billion company, earning $800 million in late fees in a single year. Once the company had become a hit, the leadership had opened up several stores around the United States and had 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, Blockbuster’s business model 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 end 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 profit, and deliver on shareholders’ expectations, all is good. But it’s not. It’s a warning signal for disaster, most of the time.  

You must listen to what the customer says, and then adapt and evolve. Whether you bet for or against the market, make sure you know your customers’ wants and needs. You must be intentional. 

If you don’t believe that you can change the mothership, then set off some squad teams in zodiacs; 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 well. So, they can focus their attention, talent, and resources on those with the most potential. 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 and, in some cases, existential disaster. You decide which route to take. But don’t complain. You are the master of your destiny. Good luck. May the digital forces be with you. 

Digitopia Digest is a monthly newsletter showcasing the latest news in digital transformation. If you are determined to discover what to do next in your organization to achieve digital success or are simply interested in digital technology and innovation, please subscribe for updates.

Author avatar
Halil Aksu