Built Not to Last

I want to build a business that won’t last.

In the world around us, many things come to a natural conclusion and end. Then why do we expect businesses—and all of their component parts—to last forever?

Imagine a business founded with an end date. After two years, the stakeholders come together, ask what the company would look like if they founded it today, and then form that company. The new business retains the good elements, sheds the bad, and moves forward with a fully-committed team.

By introducing an end to its constructs and practices, a business forces itself to evolve to the best possible design. It meets customer needs with a proactive, forward-looking operating structure, and not one rooted in the past. 

The problem of inertia

Research shows that most companies allocate the same resources to the same business units year after year. A review of over 1,600 U.S. companies between 1990 and 2005 found that inertia was the norm, with one-third of the businesses allocating capital almost exactly the same as in previous years.[1]

Studies have shown that anchoring—a form of cognitive bias where previous information influences decision making—contributes significantly to organizational inertia.[2] But the problem extends beyond budgets and resource allocation. Business leaders are also anchored to last year’s business practices, org charts, marketing messages, role definitions, technology initiatives and sales practices. That anchoring leads to incremental thinking year after year.

In their 2008 book Nudge, Richard Thaler and Cass Sunstein discuss the idea that choice architecture, or the design of environments in order to influence decisions, leads to both good and bad outcomes. Defaults are the building blocks of this architecture.[3] A default option is the option the chooser will obtain if he or she does nothing.

The push to evolve often goes against the grain of corporate culture, where the default path is maintaining the status quo. Change is uncertain, uncomfortable, and many times unprofitable. As Larry E. Greiner states in “Evolution and Revolution as Organizations Grow,” management problems and principles are rooted in time. Attitudes become more rigid, more outdated, and more difficult to change. While business leaders must be prepared to dismantle inefficient structures, evolution does not occur effortlessly.

More often than not, a businesses default path—the one taken if no decision to the contrary is made—is to continue without change. But what if the default path forced an ending?

The evolutionary concept

Evolution is the process of heritable change over time, whereby advantageous traits are preserved and bad ones rejected.[4] This process occurs over multiple generations—which is key. In nature, this means organisms need to have an end. When applied to the business world, it means business practices and constructs also need to have an end to evolve.

This intense feedback cycle creates an efficient system of improvement over time, which produces the best possible design for the current environmental conditions.

When a new product is launched, business unit created, or team started, it is designed with a start in mind, but rarely an end. By default, it’s assumed that it will carry on forever (or until specific but unspecified action is taken to modify or end it). 

Evolution is a powerful concept that results in improvement over time. Bringing this concept to work in practice requires two key principles:

• Define an end date up front. Whether it’s a business, business unit, product, marketing plan, sales plan, or a staff position, create an end date at inception and only bring people along who are comfortable with the journey. Something can’t evolve when it continues on indefinitely.
• Change the default. On the specified date, the default action becomes an ending. It’s not a review, discussion, or theoretical exercise. It ends, and if it’s decided to continue on, a new structure is born. A rebirth occurs with a forced ending, and with this we keep the good, ditch the bad, and end up with the best design possible.

4 ways businesses can put evolution into practice

1. Reinvent the business

The fundamental, key concept in this process is asking the following question: “If we were to start a company that does [whatever the company does] today, how would we do it?” Then start that company. (In the unlikely event that the answer is “exactly how we’re doing it now,” you’re not trying hard enough!)

By definition, the new business will be the one that is best designed and best positioned to succeed in the market at that time. Old practices that don’t work need to be killed, quickly and completely.

SpaceX started as an answer to the question, “If we were to launch a space flight program today, how would we do it?” In a classic illustration of the Innovator’s Dilemma, it led to significantly improved designs, processes, goals, and systems that the incumbents weren’t capable of undertaking—at a significantly lower cost.

2. Hire employees for fixed periods of time

Sports teams hire athletes for a fixed period of time. They do this because an athlete’s skills and the team’s needs vary over time. What works today might not work in three or five years. Are the needs of a business so different? 

It’s unrealistic to think that a business’s needs are going to remain constant for several years. It’s equally unrealistic to think that an employee’s skills, abilities, and desires will also remain constant.

As much as possible within the local labor laws, a business should only hire employees for fixed periods of time. At the end of that term, the business should reevaluate the position and the candidate to ensure the best possible fit.

A manager should ask the following key questions:

• Is the job that needs to be done exactly the same as it was 12 or 24 months ago?
• Is this position still needed?
• Is the person the right fit for what we need today? 

3. Rotate senior managers

The CEO—and the entire leadership team in general—sets the tone and pace of the organization. Their leadership will impact the company more than anything else. That’s why they should be replaced on a regular basis (think of it as term limits rather than being fired).

In practice, this means signing all senior managers and executives to fixed-term contracts. At the end of that term—just like a fixed-term employee—the business should reevaluate exactly what’s needed in the position and then conduct interviews to make sure it ends up with the best possible candidate for the job.

A less extreme version of this, especially if a business has great talent it doesn’t want to lose, is to rotate senior managers between different business units. Large companies like GE use this system to force evolutionary thinking while keeping great talent inside a business. The concept also works with employee rotation as a form of retention and renewal. (For more on senior manager rotation, see “Rotate the Core” on the Harvard Business Review web site.)

Huawei, the largest telecommunications equipment manufacturer in the world, has a rotating CEO system. Three deputy chairmen act as the rotating CEO for a tenure of six months each, while sitting on a board of seven with four standing committee members. The system, inspired by U.S. presidential elections, is a great example of evolutionary thinking principles in practice.[5]

4. Implement zero-based budgeting

Zero-based budgeting is a process that allocates funding based on opportunity and necessity rather than history. As opposed to traditional budgeting, no item is automatically included in the next year’s budget by default. It’s a powerful concept that, when properly implemented, can liberate a business from inertia and entrenched thinking.[6]

It is the mindset shift, and not necessarily the methodology, that makes zero-based budgeting an effective tool. It resets the discussion in favor of actively thinking about ways to make things better (forward-looking) rather than asking why it is the way it is (backward-looking).[7] Compared to other cost-cutting measures, the focus is squarely on what activities and resources are needed in the current environment.

Zero-based budgeting is a process that can work in any sized company, at any stage of growth. While it may be challenging to implement, when done correctly it successfully reduces organizational inertia and incremental thinking through a more accurate expenditure of resources. (For more on implementing zero-based budgeting in your organization, see “Five myths (and realities) about zero-based budgeting” on the McKinsey & Company web site.)

Concluding thoughts

New Zealand’s national museum, Te Papa, is ranked as one of the world’s best. It is currently undertaking a renewal program of all of its major exhibitions. It’s not simply an update with incremental change, but a total reimagination where leadership effectively asks, “If we were to have an exhibit about [whatever the current exhibit is] today, how would we do it?” By specifically ending the current exhibits, museum staff are forcing an evolution that is not anchored to the status quo.

The way businesses think about strategic planning leads to incremental thinking and incremental results. Instead of being a passive observer to change and evolving by incrementing, businesses should adopt a more proactive posture and force endings. There are many changes that any sized business can make to effectively force evolution and stay relevant in a changing, fast-paced world. It all starts with defining an end.

Footnotes

[1] See Stephen Hall, Dan Lovallo, and Reinier Musters, ”How to put your money where your strategy is,” March 2012.

[2] See Dan Lovallo and Olivier Sibony, “Re-Anchor Your Next Budget Meeting,” March 2012.

[3] See Daniel G. Goldstein, Eric J. Johnson, Andreas Herrmann, and Mark Heitmann, ”Nudge Your Customers Toward Better Choices,” December 2008.

[4] See Ker Than, “What is Darwin's Theory of Evolution?,” May 2015.

[5] See David De Cremer and Tian Tao, “Leadership Innovation: Huawei’s rotating CEO system,” November 2015.

[6] See Zero-Based Budgeting: Zero or Hero?, Deloitte 2015.

[7] See Matt Fitzpatrick and Kyle Hawke, “The return of zero-base budgeting,” August 2015.

10x and the largest technological improvements of all time

I was first introduced to the concept of 10x in Peter Thiel’s 2014 book, Zero to One. He says, “As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.”

I believe it is not just technology, but the entire customer proposition that needs to be 10x better than the status quo. In my article on the topic, The 2 Principles of Startup Success, I incorporate Clayton Christensen's concept of “jobs to be done,” which gives us a simple premise: Truly innovative or disruptive products and services offer at least a 10x improvement over how things are currently done.

Using this framework to think about new ventures is incredible helpful to entrepreneurs, start-ups, and large corporations. You should always be thinking about the value you can deliver to your customers.

The concept of 10x -- or exponential value -- is powerful. To better understand the principle in practice, we’re going to take a look at a number of 10x innovations over the past 200 years, and look for the biggest breakthrough.

Recent 10x technological improvements

Let’s start our tour with some recent technological improvements that most everyone is familiar with. The first, classic example, is the iPod.

Before the iPod came along, mobile listeners might have 15-20 songs in their pocket. The iPod gave them 1,000 songs, a 50x improvement.

When Amazon.com came along, it offered a book selection larger than 10x than that of a traditional bookstore. The Amazon Kindle continues the trend by offering a package that greatly improves the book buying and reading experience.

Given the huge selection, instant gratification purchase process, and exponential storage benefits, the Kindle offers at least a 10x improvement over the alternative -- if not more.

Tinder, the swiping dating app, is a way to meet new people. Compared to the alternative method of going to a bar to meet people (or through work, or through common friends, or through local activities, etc), Tinder makes the process dramatically easier.

Not only does Tinder offer more than a 10x improvement in throughput (the amount of people you can meet or swipe through with significantly less effort), its design also eliminates the fear of rejection, making the entire experience 10x easier and more efficient.

Another classic example of disruption, Uber offers an exponentially improved process to get from point A to point B. When the alternative is catching a taxi, Uber offers certainty, cost savings (usually), and a frictionless payment process.

The result is a 10x improved experience from start to finish.

It’s no coincidence that each of these examples is a success -- in terms of product-market fit and customer traction. There is a direct correlation between delivering exponential customer value and market traction. If a product or service is truly 10x better than the status quo, customers will flock to it!

10x improvements over the past 200 years

It’s not just the past 15 years that give us examples of 10x improvements. Reaching back a bit further gives us even more massive improvements, showing how today’s technological innovations are quite small in comparison.

It’s not a happy thought, but the development of the atomic bomb represented an exponential increase in destructive firepower.

During World War II, a typical U.S. bomber would carry around 6 tons of TNT, and bombing missions would include hundreds of these bombers. With the advent of the first atomic bomb, a single bomber could deliver up to 20,000 tons of TNT. That’s a massive 3,300x increase in destructive firepower per plane, and a 200x-300x reduction in aircraft.

The invention of railroads ushered in an era where transport costs and transit times for people and goods dropped exponentially.

Railroads made transport drastically less expensive (100x cheaper) while improving the overall customer experience and travel time -- not just incremental improvements, but exponential as well.

Likewise, the advent of air travel continued to dramatically decrease travel times.

While railroads shifted travel times from months to days, air travel moved the basis from days to hours.

If we look at transatlantic crossing times over the past 150 years we can see how long it took a passenger to travel from London to New York. Dramatic improvements in boat technology slashed travel times from 15 to four days, but it’s still not a 10x improvement. Those were incremental improvements. It wasn’t until air travel that a true 10x improvement in travel time came, reducing transit time from days to hours.

The biggest exponential improvement?

When it comes to massive 10x improvements over the status quo, there’s a clear winner from my research. This technology (and the businesses that popped up supporting it) improved communication times up to 25,000x.

The winner? The wireless telegraph.

The wireless telegraph ushered in an exponential improvement in communications, and changed the world. No longer did it take weeks for news to travel around the world. Now it happened in a matter of minutes.

Looking to the future: SpaceX

The last example is my favorite: SpaceX. In a world of incremental technological improvements and relatively frivolous tech products, SpaceX represents a return to the heady days of the 19th and 20th century, when inventions really did change our world.

The promise of SpaceX rests in its 10x value proposition through use of reusable rockets. It’s aim of a 100x reduction in payload costs to orbit is a game changer, both as a business and for us as a species. If successful, it will put space within reach for generations to come. That’s why SpaceX is such a big deal.

The power of 10x

Not every new venture can be a 10x improvement over the status quo. These technological and experience improvements are few and far between. But the quality of thinking is something that can and should be brought to every company and every new venture.

Whether you’re a startup founder or a technology executive, think about the last three products you released for your customers. What was the additional value you delivered?

Chances are that it can be measured in tenths -- a 1.1x or 1.2x improvement.

The more incremental and exponential value that you can provide to your customers, the more successful your venture will be. Not everything can be 10x, but it shouldn’t stop the thinking. So never stop asking: How can we offer an experience that is 10 times better than the status quo?

The 2 Principles of Startup Success

Launching a startup or new venture takes many things: perseverance, timing, luck, a great team, and a workable business model. Whether it’s launching a new startup from scratch, or a larger corporate launching a new product, success often comes down to two key principles.

I’ve found the following framework to be the fastest and most effective sanity check to establish if a new venture will succeed or fail.

#1 The Principle of Quality: you must provide more perceptible value than the status quo.

Simply put, a new venture needs to provide more value to users than the other available options. If we use Clayton Christensen’s framework of “jobs to be done” as a basis (booking a flight, hailing a cab, keeping track of customers, or buying groceries), then the value of the new needs to exceed the value of the current.

Value can be defined many ways: cost, utility, and convenience are fairly standard measures. The value is what the user perceives and experiences on an individual basis, not what the provider thinks. Value originates with the user, not the new venture.

The increased value needs to more than offset the activation cost of the new venture. This could be the cost associated with downloading a new app, completing a registration form, driving to a different part of town, or entering credit card details. There is always a cost associated with doing something new, and if a user perceives that the cost is greater than the value they’ll derive, they won’t switch. Pro tip: make your activation costs as low as possible!

If you must explain your value, it’s not as great as you think. 

If the value of the new is relatively close to the value of the current, you enter what I call “The Grind.” This is the unenviable position where you need to convince customers of the value you provide. As Jeff Jarvis eloquently states in What Would Google Do?, if you must explain your value, it’s not as great as you think.

Here are a few real-world examples:

• The Facebook phone -- a failure because it didn’t offer enough perceptible value versus people’s existing phones. Users already have the Facebook app.
• Uber -- compared to hailing a taxi, the app provides enhanced value by streamlining payments and real-time trip tracking -- all for (usually) less money.
• Amazon Prime -- shipping is better when it’s free, plus access to thousands of free movies and TV shows is an easily perceptible value. Other retailers don’t offer free movies and TV shows, and Netflix won’t ship you millions of products for free.
• Customer relationship management systems -- new ones typically involve the “UI value fallacy,” which is when you think a new user interface is enough of a value-add for users. It’s not. You need to provide more value to your users and help them do their job. I’ve seen plenty of ugly software packages that are very successful.

#2 The Principle of Quantity: you must have a potential market large enough to be profitable.

Providing value to customers is an important first step, but a business needs enough customers to sustain itself. Generally, the more customers you can serve, the better!

So how large is large enough? It depends on the product or service and the revenue model. Typically, the more qualifiers there are in answer to the question “who are your users?”, the more problems you’ll have.

It’s ok to start with a subset of your market, but it’s the total potential market that matters. 

A good answer sounds like: a product designed for real estate agents.

A poor answer sounds like: a product designed for real estate agents in Minnesota showing luxury homes to Chinese buyers.

It’s ok to start with a subset of your market, but it’s the total potential market that matters. And the total potential market should be large enough to effectively monetize and sustain your business.

Tesla is a great example. Its first car, the Roadster, was an all-electric sports car starting at $109,000. There’s a pretty small market for a vehicle like that. Its next car, the Model S, a luxury sedan starting at $71,500, has a much larger potential market. And its planned Model 3, an economical sedan starting at $35,000, has a very large market indeed.

Tesla’s strategy was to start small, building up the experience and expertise necessary to launch a mass-market electric vehicle.

Here are a few more real-world examples:

• AirBnb -- hundreds of millions of people stay in hotels every year, giving AirBnb a huge potential market of travelers for its service.
• Waterboy -- an app for parents to receive live updates from their children’s sporting games if they can’t attend, in New Zealand. A target market that's too small.
• Spotify -- hundreds of millions of people listen to music every month, on their phones, in their cars, and online -- and are all potential Spotify users.

Where does your new venture stand?

When you plot both principles on a simple 2x2 matrix, you can clearly see the sweet spot you want a new venture to operate in.

The matrix above forms a simple framework to help make decisions. If you have several ideas for various new ventures, plot them on the matrix. Aim for ventures that offer the biggest value for the biggest market, and shut down (or rework ideas) that fall into the other quadrants.

Using the 2 principles in practice

Any new venture should be run through the following steps:

• Accurately identify the status quo “job to be done” that the new venture is addressing. How do its potential users currently complete the task at hand? Remember, the analog might be non-technical and offline (ex: project management via post-it notes).
• Roughly determine value. Use intuition, focus groups, or paying customers as the ultimate litmus test. If you’re doing this with a small group, form your opinions individually to avoid groupthink.
• Figure out the potential market size. Are there enough potential users for it to be a worthwhile endeavor? If X users pay Y dollars, is the result big enough?

Always keep these two principles in mind when launching a new venture. Adhering to them won’t guarantee success, but ignoring them almost certainly guarantees failure.

Don’t Talk to Your Customers

I recently had two separate conversations with founders of young companies. Both were talking about strategies to grow their businesses, and my suggestion to each was to stop talking to their customers.

In each case, the business was small and growing, only capturing a small portion of the total addressable market.

As an example, let’s say your company is in the real estate technology space, and you’re selling a software solution to real estate agents. There are 1,000 possible buyers of your technology in your launch market. And perhaps you’ve signed 50 of them up as customers.

Unless you have customers paying you real money, they’re not customers. 

First off, the ultimate test of market acceptance is a paying customer. I don’t care about positive feedback, promises to sign up, or people on free trial accounts. Unless you have customers paying you real money, they’re not customers.

When you talk to your 50 paying customers, you’re talking to people who are already sold on your product. They’ve already evaluated it and have made the decision to use it in their business. Anything you learn about their pain points, the problems you’re solving, or why they like your product is nothing new to you.

If you want to grow, you need to talk to the other 950 people, the people who aren’t customers. You need to understand their specific needs and exactly what it would take to get them as paying customers.

If you only talk to your paying customers, you’re just going to reaffirm your existing assumptions in a very small, unrepresentative sample size. You won’t learn anything new. You’ll get nothing more than a distorted view of the entire 1,000-customer market.

This is a very dangerous position because it reinforces your existing prejudices. You won’t learn and you won’t grow. In fact, with that reinforced view, it may be more difficult for you to adapt your product or business model to appeal to the larger market. This tendency -- called confirmation bias -- is especially difficult for a young founding team to deal with.

I’ve seen a number of businesses fall into this trap. They achieve some small degree of success and sell their product to 50 customers. They only talk to the 50 and reassure themselves that their product is amazing. They spend their time wondering why no one else is buying it, and instead of talking to the 950 to understand their specific needs, they keep running into brick walls when no one wants to buy. They never grow, and end up in the category of zombie businesses; just successful enough not to fail.

So: don’t talk to your customers. If you want your business to grow, find the people that should be buying your product or service but are not, and spend your time talking to them instead!