If one word was used to describe the year we have just lived through my choice would be “change”. For most businesses, change is both inevitable and unnerving. Change is a New Normal, and our notions of reliability, predictability and poll-ability are coming to an end.
According to legend, an ancient king of Persia once asked his wise men, “What thought can make me happy when I am sad?” After some consideration, these wise men came back with the reply, “This too shall pass.” Supposedly, this gave the king much comfort, until he realised that this axiom held true when he was happy, as well as when he was sad.
And so it is in today’s business world. Global stock markets are approaching all-time highs, many economies appear to be recovering from the Great Recession of a decade ago, and several long-running conflicts have come to, or are approaching, their end. At the same time populist movements in dozens of countries, destabilisation in Asia and the Middle East, and the disruptive impact of new technologies such as Artificial Intelligence stand to undermine traditional business models around the world.
Looking back on 2016, it seems reasonable to observe that it was a year of surprises. From Brexit to Trump, an attempted coup in Turkey to the end of the world’s longest-standing war in Colombia, the world of politics went topsy-turvy this year. Businesses were far from immune to these changes, as demonstrated by Pokémon Go, the collapse of the proposed Trans Pacific Partnership (TPP) and the release of the Panama Papers, which revealed the extent to which the wealthy are able to hide their capital in order to create more. If one word was used to describe the year we have just lived through my choice would be “change”.
[su_pullquote]Managers know that change is ever-present, even as we implement more and more systems, processes and procedures that operate under the assumption that things do not change.[/su_pullquote]
For most businesses, change is both inevitable and unnerving. Managers know that change is ever-present, even as we implement more and more systems, processes and procedures that operate under the assumption that things do not change; or at least they change in predictable ways. This illusion of understanding and control has grown from our relentless application of the concepts of operational quality, automation, statistical process control and scientific management.
Building Wealth the Old-Fashioned Way
I’m old enough to remember the old television commercial from Smith Barney Investments, where they stated they made money the old-fashioned way, they earned it. Looking at how wealth appears to be generated here in 2017, one wonders how the definition of “earn” may have changed over time. As I discuss in my book Jerk, the basis of wealth and power in society has changed and evolved over time. When we were hunter-gatherers, knowledge was the basis of wealth. If you knew how to make a flint tool, you were powerful. Later, the possession and control of land became the basis of wealth and power. This led to five millennia of kings, queens and other royalty whose wealth came from their control of dirt.
The landed gentry eventually yielded to the capital barons of the last two hundred years, where control of capital defined the have’s and have-not’s. And now, in the early 21st century, we are witnessing yet another shift in the basis of power. Information is replacing capital, just as capital replaced land and land replaced knowledge. Human society has witnessed these changes before, just never before with such alacrity.
What does this transition from capital-centric to information-centric wealth mean for businesses? It depends on whether your organisation was born analog, or born digital. Analog companies are those who organise themselves around capital. Their entire purpose is to manage, control and ultimately grow the capital at their disposal. They apply the Analog Trinity of Bureaucracy, Process and Rules in order to create more wealth. Digital companies organise themselves around managing, controlling and growing information, rather than capital. They apply the Digital Trinity of Mobility, Social Media and Analytics to do this.
What is key to understand here is that digital companies, such as Uber, Airbnb, Google or Amazon use an entirely different set of tools (the Digital Trinity) to create an entirely different kind of wealth (information wealth). They aren’t better businesses than traditional Analog companies, they’re fundamentally different. Hence, when existing Analog companies, those aligned with and centred on capital, try to compete with digitals they’re effectively shadow-boxing with themselves. They show up in the ring ready for fisticuffs, only to find out that their competition showed up to the fight with an armed aerial drone that they control from a living room a continent away. It’s not that digital companies don’t play fair; rather, they don’t acknowledge that rules even exist.
There is a growing number of start-ups that have reached and passed the magical threshold of a billion-dollar valuation. These companies have been called “unicorns”, as there was a time not so long ago when such companies were exceedingly rare. Digital unicorns worth billions of dollars operate at huge financial losses while delivering their “free” services to billions of users world-wide. Their business models seem to defy logic, but only in an Analog world. In the digital world, these companies are harvesting enormous amounts of information wealth from their users, free of charge. Over the last decade, the smart phone and the app may be the basis of the largest transfer of wealth in all of human history, and all of that wealth consists of information.
Not only do digitals build a different kind of wealth than analogs, they also use different units of measure. Analogs measure wealth the way most of us are used to: money. But, not all capital is the same. Money is not as fungible as it may seem; some brands are more valuable than others. From the beginning of the Industrial Revolution through World War II, the English Pound Sterling was the best brand in the world. It was only after World War II that the United States Dollar became the most valuable currency in the world. To the victor go the spoils. Regardless of their preferred brand, capitalists count their pounds, dollars, euros or yuan with maniacal focus, much like Ebenezer Scrooge in Dicken’s “A Christmas Carol”.
Digitals keep track of money too, if only to keep score and to pay their bills. But, digitals really focus on an entirely different set of metrics: users, page views, “likes”, and bytes. Digitals work to accrue these items like so many pennies from heaven, believing that they represent wealth in the new world.
Reaping What You Sow
Before the industrial revolution, wealth was more grounded, literally. The unit of measure for wealth in the landed era was the acre, or more modernly the hectare. A lord may inherit a thousand acres, and if they were shrewd business managers they’d retain those thousand acres for their children. Royals could increase the size of their holdings by war, guile or a few well-placed favours to their king, but by and large, increasing wealth in the landed era required investing in and improving what you had.
Such investment in what you had was central to wealth-building in this era, hence the evolution of irrigation, crop rotation, fertilisation and feudal labour. Lords worked to make improvements in the productivity and value of their lands, and typically held the long view in investing. As long as populations increased, and the economy expanded, land would increase in value. Hence, patience was a virtue in this time before the quarterly report.
The notion of investment continued in the capital era, but capitalism introduced another mechanism for creating wealth: cost cutting. Certainly, there were efficiencies to be gained in managing land, but if you skimped on water, fertiliser or seed for very long, your land could end up irreparably harmed. As we have all witnessed for a couple of centuries, this limitation isn’t as strong in capitalism. Indeed, under capitalism a penny saved is a penny earned, and then some.
Cost cutting often prevents investment, as it can appear to be less risky to do nothing than to do something. This is particularly true in capitalism, where the notion of compounding interest rewards people for their indecision. Put off an expenditure for any length of time and interest ensures that you still have more money than you started with. After centuries of selective-breeding, many managers are highly skilled at not investing, or even acting, in order to become wealthier. This is a key tenant of capitalism. Mere possession leads to greater wealth over time.
This then leads to one of the fundamental differences between capital and information. As long as interest rates are positive (no longer the foregone conclusion that it once was), capital increases in value over time. Information isn’t like that. Frequently, the value of information decreases over time. At other times its value suddenly spikes, then vanishes in an instant.
Examples like this are now part of our daily lives. The moment you call for an Uber ride, you have a need that must be filled. The first driver to pick you up earns a fare, the second driver earns nothing. The e-commerce site that provides the lowest possible price at the moment you search for an item gets your business. The company that updates their prices every night in a batch process loses every time.
In the digital era, information wealth is created only when information is put to use; there is no compounding interest with bits and bytes. Further, unlike capital, which grows through mere possession, information that is held but not used is nothing but a cost centre.
The Sands of Time
In the Imperial Age, it would have been nearly unthinkable to make a business decision regarding land without so much as a by-your-leave from the landed-gentry in power. Many explorers, merchants or conquistadores would wait years, or even decades, before being granted the approval of their chosen noble. Time was doled out as slow as molasses in winter, and decisions that defined a lifetime would often take that long to make.
Move forward to the capitalist era, and our sense of time accelerated greatly. From decades or years down to years and quarters. Things happened much more quickly over the last two centuries, up to a point. The challenge to faster decision making was the reward inherent in compounding interest. Even if you never did anything, you could still earn a good living if you started out with something. This, combined with the easy short-term gains earned from cost cutting, led to the enormous wealth most of us are surrounded with every day. Better and cheaper became the pillars of capitalism, with faster being used when it suited our aversions to risk. Over decades of optimisation, many organisations have developed the ability to act with aching, agonising, and now antiquated, lethargy.
The incentive to do nothing, or to cost cut our way to short term profitability, fail us in this new digital era. In the information age we still have the notions of “saving” and investing, but they manifest in entirely different ways. To “invest” in information, you must have it. Here’s where aggregation comes into play. This is how digital companies such as Apple, Google or Amazon make their “investment” in information. They strive to collect as much information as they possibly can, so that it can be correlated, manipulated and massaged into wealth. Unlike money, data is not fungible. You can’t trade my data for your data and expect to get the same results. So, digitals spend enormous amounts of money “investing” in information, collecting as much of it as they possibly can.
[su_pullquote]Information must be put to use at the proper moment, location, and need in order to maximise its value, and to create more power and wealth.[/su_pullquote]
But, unlike capital, a gigabyte saved is emphatically not a gigabyte earned. Data has no value unless it is put to use, and in order to “save” the value of information, you must act upon it while it still has value. While the unit of investing in information wealth is the byte, the unit of saving information wealth is the second. In the Digital Age investing in and saving wealth are not interchangeable, they’re complimentary. Information must be put to use at the proper moment, location, and need in order to maximise its value, and to create more power and wealth. This is why context, where things are in space and time, is the new king and companies that traffic in context are those who stand to rule the digital world of the future.
Embrace the New Normal
Returning to Brexit, Negative Interest Rates and President Trump, as we move from the Analog, Capitalist Era to the Digital Information Era the one thing we should all expect is change: rampant, radical, revolutionary change. The more we hold on to old expectations, beliefs and fundamentals, the more likely it is that we will be disrupted by what actually occurs in this new world. Predictability, a matter of gospel to analogs is the exact opposite of what Digitals look for and feed upon. Digital companies, and the customers they serve, don’t value predictability, they value novelty. This novelty is fuelled by the potent combination of data and context, the simultaneous investing in and saving of information wealth created when Digital companies deliver what we want or need instantaneously, perfectly and seamlessly.
What is an analog to do in the face of such digital disruption? The options are quite simple, really. Continue doing things the same old, analog way, in the hope that the piles of capital you’ve accrued during the capitalist era survive the transition. This is the same strategy that many of the land-based well-to-do followed in the face of the Industrial Revolution two hundred years ago, and there were a few of those institutions who survive to this day.
The second strategy is to attempt to evolve with the world around us. This entails taking what capital wealth your organisation has today, and converting it into information wealth as fast as you possibly can. This is precisely the strategy being followed by Silicon Valley, as they dump ever-growing billions into their favoured “unicorns”.
As companies such as Amazon, Facebook, Apple and Google each surpass half-a-trillion-dollar market valuations, one wonders if there is any question of which strategy is most likely to succeed in the coming decade. Change is a New Normal, and our notions of reliability, predictability and poll-ability are coming to an end.
Improvisation Instead of Inaction
Information has no value at rest, and it’s value is fleeting. To win in the digital era, organisations must not only accrue information, they must put it to use at the right time. While capitalism rewarded organisations for being slow, methodical and indecisive, the information age insists upon taking risks, remaining flexible and improvising. Analogs have been trained to loathe taking action without precise knowledge of the outcome, as Capitalism demands precision and predictability. However, in the Digital Age waiting for the perfect conditions before choosing to act has become a path towards failure, rather than guaranteed success.
An ancient Persian folktale tells1 of a wandering dervish who was starving and lost in the desert. As he was walking along an old pathway in search of something to eat, he found an empty fruit sack that had been thrown by the road by a previous passer-by. The dervish picked up the sack and swung it over his shoulder while praying loudly, “Thank God for giving a starving man an empty sack of fruit”, as he continued to walk.
After he walked some more, he came across on old hunting bow whose string was broken. He picked up the bow and put it in his sack, and prayed out loud, “Thank God for giving a starving man a hunting bow with a broken string.”
A bit further down the road, he saw an old tree that was dead and bore no fruit. He broke a few dry branches off the old tree and put them in his sack, and again said loudly, “Thank God for leading a starving man to a dead fruit tree”, and then he continued on his way.
He walked some more and found a dented old cooking pot. He picked up the old pot off the ground, blew the dust off of it and put it in his sack too. He again loudly prayed, “Thank god for giving a starving man a dented old pot full of dust.”
As he continued walking, he found on the ground a fishing hook but no fishing pole. He picked up the fishing hook, put it in his sack and again declared loudly, “Thank God for giving a starving man a fishing hook with no fishing pole.”
Finally, after days of walking, his path ended at a river that was so large he couldn’t see the other side. The old dervish fell to his knees at the river bank and prayed loudly, “Thank God for leading a starving man to a river so great that he cannot hope to cross it.”
Then, he tied the fishing hook to the broken string on the hunting bow, and using it as a fishing pole, he caught himself a fish that he cooked in the old pot over a fire he had made from the dried tree branches.
Teaching One to Fish
[su_pullquote]Digitals use what they have at hand, apply it in the best way they know how, and through rapid trial and error, catch their evening’s dinner.[/su_pullquote]
Digital companies like Amazon or Facebook do not wait for the perfect tool, solution, forecast or consensus before they decide to act. Rather, they use information to improve their ability to improvise, which leads to ever-improving answers. Analogs may starve to death next to the ocean of information, as they wait for the perfect fishing pole to come along. Digitals use what they have at hand, apply it in the best way they know how, and through rapid trial and error, catch their evening’s dinner. Over time, I suspect we will see the shoreline of the digital ocean littered with more and more Analog companies dying of starvation, and from carrying an enormous sack of not-quite-perfect answers to their problems. Digitals? They’ll be growing fat on their catch of the day.
About the Author
Christopher Surdak is an Engineer, Juris Doctor, Strategist, Tech Evangelist, 2015 Benjamin Franklin Innovator of the Year, and Honored Consultant to the FutureTrek Community, Beijing, China. He has recently launched his own consultancy firm Surdak & Company. His latest book is Jerk: Twelve Steps to Rule the World. He is also the author of Data Crush: How the Information Tidal Wave is Driving New Business Opportunities, which is GetAbstract’s International Book of the Year for 2014.